When married, most every couple files taxes jointly. They claim both children as dependency exemptions. This allows them to maximize the tax benefits of being a family in the United States. When that party divorces, they raise these once simple tax decisions 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? This is not tax advice. I am not a tax professional, so please consult one for guidance. 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, filing jointly is more favorable than Married Filing Separately. Currently, the tax brackets offer better benefits for joint filers. However, in order to elect Head of Household, you must qualify.
Qualifying for Head of Household Status. Under the federal tax code, the IRS considers someone a head of household if they are unmarried. The individual’s home must be the “principal place of abode” for a qualifying child for over half the year. To maintain such a home, you must cover more than half its cost. This must be for over half the year. What if the parties each had 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. The court may analyze custody to determine which parent receives the status, as time with children isn’t always equal. In some cases, neither parent may receive the status. If there are multiple children, both parents might get the status. You cannot trade filing status between the parties by agreement. Instead, the facts of the case determine it, so know those facts when filing and communicate them to your tax professional while preparing your returns.
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 provides that when there is a custody agreement, the parties may agree that the noncustodial parent receives the exemption, as long as the custodial parent signs a written declaration, called a Form 8332, and attaches it 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. The taxpayer reduces this credit once they make 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 group all the tax benefits into one paragraph and trade them freely, even though they can’t all be traded. One party agrees to receive the dependency exemption, but the agreement does not specifically require the additional step of completing Form 8332.
Whether a deduction or filing status will help a parent and to what extent requires some analysis. You won’t properly complete that analysis unless a divorce lawyer who understands how these tax benefits work represents you, especially if you have minor children. You should seek 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.