The parent with physical custody of a child, whether during a separation or after a divorce, has a superior right over that of the non-custodial parent to allowed child tax benefits. Once the divorce decree is entered, some of those benefits could be transferred from the custodial to the non-custodial parent, but only if the decree or separation agreement provides for it or the custodial parent agrees to waive the benefit.
Parents with a joint or shared custody agreement need to be aware of the child-related tax benefits and handle the issue of which parent gets to take them in their parenting agreement. The time for parents, especially a non-custodial parent, to deal with these tax issues is before a divorce agreement is signed or a court order entered. Below is a brief explanation of the child-related tax issues.
When you think about taxes and kids, the tax benefit most people think of first is the dependent deduction. This deduction always goes to the custodial parent, as defined by the I.R.S., who receives the right to take certain allowed income adjustments, itemized deductions, non-refundable tax credits and refundable tax credits. The non-custodial parent only receives the right to claim certain itemized deductions associated with the child. In 2002 a dependent exemption will reduce your taxable income by $3,000, which is reduced for higher income earners.
New for 2002 is the right of a parent to claim an adjustment to gross income of up to $3,000 for qualifying educational expenses for a dependent child attending a qualifying post-secondary school. A choice must be made between taking an adjustment to income or an education tax credit.
Both custodial and non-custodial parents can claim an itemized deduction for any medical expenses that he or she pays directly for the care of their child, but only to the extent that their total medical expenses exceed 7.5% of their adjusted gross income.
Some states have an itemized deduction for post-secondary educational expenses for a child.
A tax credit is a dollar-for-dollar reduction in your income tax owed to the IRS. A non-refundable tax credit means that if the amount of your credit exceeds the amount of tax you owe, the IRS will not pay you money for the amount that the credit exceeds your tax owed.
The non-refundable tax credits available to a custodial parent with a qualifying child are: child and dependent care credit, child tax credit, education credit.
A non-custodial parent cannot claim the child care credit even if he or she is able to claim the qualifying child as a dependent and take the dependency exemption on his or her tax return. The maximum amount of child care expenses used to calculate the credit are $2,400 for one qualifying child or $4,800 for two or more. The credit is a percentage of the allowed expenses based upon the income of the parent.
The maximum child tax credit is $600 per qualifying child. This tax credit travels with the right to claim the dependent exemption for the child.
The parent able to claim a child as a dependent can claim an education credit for allowed post-secondary educational expenses for that child. A non-custodial parent who can claim a qualifying child as a dependent on his or her tax return may also be able to claim either the hope credit or the lifetime learning credit.
Refundable tax credits are those which could result in the amount of taxes you owe being a negative number and the IRS sending you a refund for that amount. The two refundable tax credits for parents are the additional child tax credit and the earned income credit.
If the amount of your non-refundable child tax credit exceeded the amount of tax you owed, the excess amount could be claimed as an additional child tax credit refundable to you. However, your taxable earned income must exceed $10,350 to claim the additional child tax credit.
If you have three or more children, the rules for calculating your additional child tax credit are different.
This refundable tax credit, worth anywhere from $3 to $4,140, is available to the qualifying parent with physical custody of one or more children.
There are several "tests" that must be passed before the parent can claim this credit, some being: the parent must have earned income of less than $29,200 per year and the qualifying child must be under the age of 17. There are different schedules used to determine the tax credit if you have only one qualifying child or two or more qualifying children.
In some circumstances, either - but not both - parent could claim an earned income credit for a qualifying child, even if that parent cannot claim the child as a dependent on his or her tax return.
I am constantly surprised and saddened by the number of divorcing and divorced couples with tax problems which could have been prevented only if they or their divorce lawyers had been more educated about the special tax issues of divorce. That's why I've written 100+ Tax Tips for the Separated, Divorcing and Divorced which covers just about every tax issue you should plan for both during and after a divorce.
© 2003 Laura Johnson
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The author and publisher of this article have done their best to give you useful and accurate information. This article does not replace the advice you should get from a lawyer, accountant or other professional if the content of the article involves an issue you are facing. Divorce laws vary from state-to-state and change from time-to-time. In addition, it is a very fact-specific area of the law, meaning that the particular facts of your marriage and divorce, as well as other external factors may determine how the law is applied in your situation. Always consult with a qualified professional before making any decisions about the issues described in this article. Thank you.
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