When married, most every couple files taxes jointly. They claim both children as dependency exemptions and reap the maximum tax benefit of being a family in the United States. When that party gets divorced, these once simple tax decisions come up for debate. Who gets which tax benefit? What is negotiable and what’s not?
Filing Status. Clearly, filing “Married” is no longer an option. During your marriage, you may have filed as “Married Filing Separately” but more likely filed as “Married Filing Jointly” due to its preferred tax treatment. Now that you are divorced, your options are “Single” or “Head of Household”. Which do you choose? Well, just as I say when answering any tax question, this is not tax advice as I am not a tax professional. I’m a divorce lawyer with a fairly robust understanding of how tax law applies through the process of divorce. That said, this one is pretty straightforward. Electing Head of Household is generally more favorable than Single. Actually, it’s generally more favorable than filing Married Filing Separately because, at least at this point in time, the tax brackets are more favorable. However, in order to elect Head of Household, you must qualify.
Qualifying for Head of Household Status. Under the federal tax code, an individual shall be considered a head of household if he or she is not married at the end of the taxable year and his or her home is the “principal place of abode” of a qualifying child of the individual for more than half the year. You also can’t be considered to maintain such home unless you’re providing more than half the cost of such home for more than half the year. What if the parties each have exactly equal time with the children in the previous tax year? Does each party get to claim the children? Does neither party? Well, remember that the language of the provision is that it must be the principal place of abode for more than half the year, so if the time is equal, then logically, either party would get the HOH status, right? Look closer and remember that there are 365 days in a year–an odd number. It’s not really possible for each party to have the children an exactly equal period of time each year, so an analysis may be completed to determine which parent gets the status. Note that it’s possible that neither parent would get the status and that, in the case of multiple children, both parents may get the filing status. Filing status is not something that can be traded between the parties by agreement. Rather, it’s based on the facts of the case; so, know those facts when filing and communicate them to your tax professional when your returns are being prepared.
Dependency Exemptions. Generally speaking, the dependency exemption for a child belongs to the child’s custodial parent, defined as the parent in whose home the child resides more than half the nights or, if the parents have equal time, with the parent with a greater income. However, the law also provides that when there is a custody agreement, the parties may agree that the noncustodial parent have the exemption, so long as a written declaration, called a Form 8332, is signed by the custodial parent and attached to the noncustodial parent’s return. For the child to qualify, he or she must also either be less than 19 years old or less than 24 and a student.
Child Tax Credit. This tax credit is significant, a dollar for dollar credit against taxes owed up to $1,000 for each qualifying child, and it goes to the parent who qualifies for the dependency exemption. This credit is reduced once the taxpayer makes over a certain amount. For an unmarried individual, that threshold is currently $75,000.
Child Care Tax Credit. This is different than the Child Tax Credit. The purpose of this credit is to encourage people with young children to seek employment. This too goes to the parent who qualifies for the dependency exemption for children younger than 13 years old and who also reside at the tax payor’s residence for more than half the year.
In my practice of family law, I’ve observed other practitioners make mistakes in drafting the provisions related to tax treatment post-divorce. Oftentimes, lawyers will group all the tax benefits into one paragraph and trade them freely, when clearly they can’t all be traded. Alternatively, a dependency exemption is agreed to go to one party, but the additional step of completing the Form 8332 is not specifically required.
Whether a deduction or filing status will help a parent and to what extent requires some analysis. That analysis won’t be done properly if you’re not represented by a divorce lawyer who understands how these tax benefits work and so, particularly if you have minor children, I encourage you to seek out the counsel of a divorce attorney knowledgeable in the tax implications of divorce and custody arrangements. To schedule a free attorney consultation with our office, call 978-225-9030 during regular business hours or complete a contact form here and we’ll get back to you at our first opportunity.