Divorcing couples always have at least basic questions about the impact of divorce on their taxes and their tax status.
Everything depends on whether your divorce was final on December 31st of the tax year in question. If it was, you can file as single. If it wasn’t, you can file jointly or as married, filing separately.
Although married couples filing joint returns receive more favorable tax treatment, each joint filer will generally be responsible for the couple’s entire tax liability.
Child Dependency Exemption:
This generally goes to the custodial parent, although it can be negotiated away to the non-custodial permanently or in alternating years. A special IRS form must be signed by the custodial parent if the exemption is being bargained away.
Dependent Child Care Tax Credit and Earned Income Credit:
These go to the custodial parent and that is not negotiable.
Education Tax Credits:
These go to the parent who has the dependency tax exemption.
Tax issues in divorce and separation
By PATTI S. SPENCER
Published: Aug 27, 2007 12:00 AM EST
LANCASTER COUNTY, Pa. – Second in a series: What is my filing status after divorce? Who claims the kids?
Your marital status on the last day of your tax year, December 31. determines your income tax filing status. If you have a final decree of divorce, you can file as single, or you may qualify for head of household status. If the divorce is not yet final as of December 31, you can file jointly or married filing separately. Usually filing jointly results in a lower tax. However, filing jointly will make you liable for your spouse’s taxes, penalties and interest – the husband and wife have "joint and several liability" on a joint return.
To qualify as head of household you must meet the following requirements:
1) You paid more than ½ the cost of keeping up your home during the year; 2) your home was the main home for you and your children for ½ of the year; and 3) your spouse hasn’t lived in the home for six months.
The dependent exemption is $3,400 for each child. If the taxpayer is in the 30% bracket, this results in a $1,020 tax savings. Which parent can claim the exemptions for the children?
The dependency exemption cannot be split. When support is augmented by third parties and if between both parents they provide more than 50 percent of the support, the exemption generally goes to the custodial parent. Otherwise, an agreement must be made as to which one person gets to claim the dependency exemption. The custodial parent is the one with whom the child lives for more than half the year. The custodial parent can release the exemption to the non-custodial parent by filing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents. Using this form, the custodial parent can release the exemption for just one year or for future years as well.
A signed shared custody agreement that is incorporated in the divorce decree may stipulate that the noncustodial parent is "entitled to claim" the children as dependents. Nevertheless, the custodial parent should still sign and complete Form 8332 to release the exemption.
If custody hasn’t been determined and one parent pays the majority of the living expenses for a child and has physical custody for the majority of the year, that parent may claim the child as a dependent.
The parent who claims the dependency exemption for the child is the parent who can claim the under age 17 child tax credit ($1,000). The child tax credit goes with the exemption.
On the other hand, with regard to the dependent care credit, if you are the custodial parent, you can claim the dependent care credit for the child even if you can’t claim the dependency exemption. If you are the non-custodial parent, you can’t claim the dependent care credit.
Physical custody for the greater part of the year is the key factor in determining who can claim the dependent care credit and the earned income credit (EIC). The EIC has more requirements than just custody. Relinquishing the exemption to the non-custodial parent has no impact on either the child care credit or the EIC. These two credits can only be claimed by the "custodial" parent.
The Hope credit which is $1,650 per child for the first two years of college follows the same rule as the Under Age 17 Child Tax Credit. The parent claiming the Hope credit must also be taking the dependency exemption for the child. Similarly, the lifetime learning credit (up to $2,000 per return) may only be taken by the parent who may also take the dependent exemption.