If you are a parent getting divorced, you certainly have your plate full. Even during this hectic time, you want to find time to consider the tax implications of divorce. It is a good idea to consult your tax advisor during the negotiations to discuss how to take advantage of the dependency exemption for the children, child care credit, child tax credit, and potential Head of Household filing status.
Custodial Parent and Noncustodial Parent
Many tax rules hinge on who is the custodial parent. The custodial parent is who the child lived with for the greater number of nights during the year. The other parent is the noncustodial parent.
- If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one the child lived with for the greater number of nights during the remainder of the year.
A child is treated as living with a parent for a night if the child sleeps:
- At that parent’s home, whether or not the parent is present, or
- In the company of the parent, when the child does not sleep at a parent’s home (for example, the parent and child are on vacation together).
- If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income.
- If a child was not with either parent on a particular night (because, for example, the child was staying at a friend’s house), the child is treated as living with the parent with whom the child normally would have lived for that night, except for the absence. If it cannot be determined where the child normally would have lived or if the child would not have lived with either parent that night, the child is treated as not living with either parent that night.
In most cases the dependency exemption will belong to the custodial parent.
A custodial parent may choose to release the exemption to the noncustodial parent by completing Form 8332. The noncustodial parent must attach a copy of this form to his or her tax return. If your divorce agreement gives the dependency exemption to the noncustodial parent, you may want to also include language that requires the custodial parent to sign a Form 8332 for the years in question.
Child Tax Credit
Any available Child Tax Credit belongs to the parent who claims the dependency exemption.
Child Care Credit
Child Care Credit belongs on the return of the custodial parent. The credit may not be taken on the noncustodial parent return, regardless of the language in your divorce agreement.
Head of Household Filing Status
Single tax rates are higher than Married Joint rates. You may qualify to use Head of Household filing status and take advantage of lower rates. To qualify, you must:
- Be unmarried at the close of the tax year, or have lived apart from your spouse for at least the last 6 months of the year.
- Maintain a household which, for more than one half of the year, is the principal place of abode for a qualifying individual who is a member of the household (a dependent child, for example).
Most custodial parents meet this definition.
IRS Publication 504, has detailed information for divorced or separated individuals. Keep in mind that if your divorce agreement spells out items that contradict the tax law, you are still obligated to file your returns according to tax law. Your tax advisor can help and will be a valuable resource both during and after the divorce.