Tax Considerations: Claiming a Child After Divorce

Often in divorce, a court order stipulates which parent may claim a child or children on their taxes. This can also be used as a bargaining chip for either party when negotiating an agreement. But, what does the Internal Revenue Service (IRS) say about who can claim a child? While a local court may stipulate who can claim a child for any given tax year or determine a schedule for future claims, it is important for divorcing parents to understand the IRS rules that govern an individual’s right to claim a child as a dependent.

Does the child qualify as a dependent?

The first consideration is whether a child qualifies as a dependent. To qualify as a dependent, the child must meet all the following conditions1:

  1. The child must be the tax-payers biological child, stepchild, foster child, full or half-brother or sister, or a descendant of any of them.
  2. The child must also have lived with the taxpayer for more than half the year.
  3. The child must not have provided more than half of their own support.
  4. The child must not file a joint tax return, and
  5. The child must be under the age of 19.

Custodial vs. non-custodial parents – claiming a child

IRS Publication 504 details how a child qualifies as such and how that child may be claimed by a non-custodial parent. But what constitutes a “custodial parent”? The IRS determines which parent is the custodial parent, first by determining the number of nights a child spends with each parent. The parent with whom the child spends the most nights during the tax year will be considered the custodial parent. This means it may not always be based on the number of nights of parenting time specified in a custody agreement. Instead, a child is treated as living with a parent for a night if the child sleeps at the parent’s house, or, if the child is sleeping elsewhere with the parent, such as on vacation. Should the child sleep elsewhere, without a parent, the child is treated as having lived with the parent with whom they normally would be for that night. If the child spends an equal number of nights with both parents, the IRS will treat the qualifying child as a dependent of the parent with the higher adjusted gross income.

In order for a non-custodial parent to claim a qualifying child, it is necessary for the custodial parent to complete IRS Form 8332 for every year the child will be claimed by the non-custodial parent. This form should be completed by the custodial parent, annually, after the IRS eligible custodial parent has been determined. Once completed, the form must be attached to the non-custodial parent’s tax return, when filed.

Tax Cuts and Jobs Act (TCJA)

When the Tax Cuts and Jobs Act legislation was enacted, dependency exemptions were repealed and parents claiming the deduction were no longer able to deduct the $4,050 from their taxable income for each dependent. Instead, each child qualifies for a $2,000 refundable tax credit, which reduces the parent’s tax liability dollar for dollar. Another change from the TCJA is that these child tax credits are now refundable. This refundable portion is now equal to 15% of the parent’s earned income which exceeds $2,500 up to a maximum credit of $1,400.

Eligibility for claiming the Earned Income Tax Credit (EITC)

In addition to the child tax credit, a custodial parent may also be able to claim the Earned Income Tax Credit (EITC). The right to claim this credit cannot be released to a non-custodial parent, even if the custodial parent releases their claim to the child tax credit exemption. To claim the EITC, the custodial parent must2:

  1. Have a social security number valid for employment.
  2. File head of household, married filing joint, qualifying widow or single.
  3. Be a U.S. citizen or resident alien.
  4. Not claim foreign earned income.
  5. Not earn more than $3,600 in investment income during the tax year.
  6. Have earned income during the tax year.
  7. Not qualify as a child of another tax filer.
  8. Have a child/children.
  9. Have a valid social security number for the child.
  10. Be eligible to claim the child as a dependent either by parenting time or tie-breaker rules.
  11. Have a child who passes the residency, age, joint return and relationship tests to qualify as a dependent.
  12. Not have earned more than the maximum amount of adjusted gross income and earned income for the given tax year.

Though it may seem like a straightforward process to transfer claim rights between parents based on a court order, the IRS has its own rules that trump those of any local court. When negotiating or arranging for these types of considerations in a divorce decree, all parties should be aware of their rights and requirements under the IRS code.

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Footnotes
  1. Internal Revenue Service Publication 504, page 9.
  2. IRS Publication 5334, page 1.
Josephine Giordano
Josephine Giordano

Josephine Giordano is a Director in the Financial Forensics and Valuation Services Group at BeachFleischman PC.

Teresa Judd
Teresa Judd

Teresa Judd, CFE has five years of experience in tax, audit, forensic accounting and other litigation consulting and expert services. She has over eight years of experience in accounting services which includes bookkeeping for private companies.