Child Tax Credits and Divorce

By Staff Writer

One issue which is often negotiated in the context of a divorce or separation is that of tax credits. Who can claim certain deductions is often fiercely debated between divorcing parties. Parents of minor children who are going through this process all too often overlook various tax deductions and the ramifications of relinquishing the child dependency exemption.

If you are in the midst of settlement negotiations, you may well be aware that it is permissible under the Internal Revenue Code to assign the right to claim the child dependency exemption to either parent. A non-custodial parent can claim this exemption provided that the custodial parent executes IRS Form 8332. Assigning the exemption to the non-custodial parent, however, may effect the right to claim other tax credits.

Two credits which are not effected by assigning the dependency exemption to the non-custodial parent are the child care credit and earned income credit. These deductions can only be claimed by the custodial parent (whichever parent has physical custody of the children for the greater part of the year). Even if the custodial parent has relinquished his or her right to claim the dependency exemption, the right of that parent to claim the child care credit and/or earned income credit will not be effected. Similarly, a non-custodial parent who has been granted the right to claim the dependency exemption may not claim either the child care credit or earned income credit.

Three other potentially valuable credits, however, are effected by who has the right to claim the dependency exemption. The Under Age 17 Child Tax Credit, Hope Credit and Lifetime Learning Credit may only be claimed by the parent who has claimed the dependency exemption. Even if you have physical custody of the children, if you do not have the right to claim the dependency exemption, you will not have the right to claim these three credits.

While the Hope Credit and Lifetime Learning Credit may only be claimed if your income falls below a certain level, the right to claim these, and the Under Age 17 Child Tax Credit may represent valuable tax savings to you. If you have relinquished the right to claim the dependency exemption, you will have also forfeited your rights to claim these three credits.

In negotiating the terms of your Divorce of Separation settlement, you should contemplate and specifically address not only the dependency exemption, but also these other child tax credits. Insofar as many attorneys are unfamiliar with the Tax Code, it would be wise to consult with an accountant to discuss these and other tax issues in detail prior to entering into a Divorce or Separation settlement.