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When you're in the middle of a child custody dispute, there are a lot of things to think about: how legal custody will be arranged, what your parenting time schedule will be, child support, and so on. One of the last things parents tend to think about when divorcing or deciding custody is who will claim the kids on their tax return after divorce. This easily-overlooked detail can be worth hundreds or even thousands of dollars, though, so it's worth considering.
There are a number of advantages to being able to claim your child as a dependent on your federal income tax return. For tax year 2016, a parent can claim a dependent exemption deduction of $4,050 per child. While this doesn't mean your taxes are reduced by $4,050, it does mean that your taxable income is reduced by that amount. If you are in, for example, the 25% tax bracket, that dependent exemption will save you about $1,100 per child claimed. If your tax bracket is higher, you'll save even more.
You may also be eligible for certain tax credits. Tax credits are more desirable than deductions, since they directly reduce the amount of your tax, not just the amount of income on which your tax is calculated. The Child Tax Credit is worth $1000 and is available for qualifying children under the age of 17. It is only available, though, if you claim your child as a dependent on your tax return. This credit begins to phase out for single parents who earn more than $75,000 per year.
If you pay for child care for a child aged 12 or younger so that you can work (or actively look for work), you may also qualify for the Child and Dependent Care Credit. This credit can reduce your taxes in the amount of 20% to 35% of up to $3000 in child care costs for one qualifying child or up to $6000 for two or more children. Again, you must have dependent children to qualify for this credit
If your wages and income from self-employment fall below a certain threshold, you may also be eligible for the Earned Income Tax Credit. You do not have to have a qualifying dependent child to claim the EITC, but if you do, the amount of income you can earn while still qualifying for the credit goes up.
If you are considered the "custodial parent," the Internal Revenue Code gives you the right to claim your child as a dependent on your taxes. For purposes of the tax code, this means whichever parent the child spends more overnights with during the year. If you and your ex share time almost equally, but your ex had the children one more night during the year than you did, this can lead to a financial windfall for them and nothing for you.
Fortunately, you can negotiate the right to claim your child or children as a dependent. Many ex-spouses or ex-partners agree to take turns claiming the children in alternate years. If there are an even number of children, one parent might agree to claim half the children on their return while the other parent claims the other half. In any case, don't forget to take into account any tax credits for which one child, but not another, might make you eligible.
Whatever your agreement, you need to let the IRS in on it. You do this by filing IRS Form 8332, which is signed by the so-called custodial parent, granting the other parent the right to claim the exemption. Be aware, however: if the custodial parent refuses to sign the form, there's not a whole lot the non-custodial parent can do about it. Sure, they could file a motion to compel the other parent to comply with the agreement in the divorce decree. But the cost of doing so would likely outweigh the benefit of receiving the exemption.
It's possible that a carefully-worded provision in a divorce decree could help prevent this issue. Speak with an experienced Minnesota divorce attorney regarding the tax impact of your custody arrangement.
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