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2 March 2016

virginia beach tax prep child tax creditsChildren under the age of 17 can be very valuable on a tax return. I miss the days when my children were younger and I could claim them all on my return. I think I was always extra nice to them around tax season after seeing how much they had saved me on my taxes. They might have noticed, though I doubt they enjoyed being called “my little exemptions” for a week or two.

Any dependent for tax purposes will provide some benefits, but this article is focused on the federal tax benefits for children under the age of 17. When I use the term “children” in this article I am referring to children under the age of 17.

The five big benefits children can bring to a tax return are:

• The child’s personal exemption, reducing the amount of your money exposed to taxation
• The ability to claim Head of Household filing status (for single taxpayers)
• Child Tax Credit/Additional Child Tax Credit
Child and Dependent Care Credit (for children under 13)
Earned Income Tax Credit

With all of those potential benefits, the ability to claim children on your tax return can make a huge difference in your tax liability to the federal government. Not surprisingly, the value of children on a tax return has led to some disputes between taxpayers as to who can claim a child for tax purposes. Often this is between parents who have split up, with both parents providing support to the child(ren).

The IRS has rules governing who may claim a child for tax purposes. These rules do not always match a “divorce decree” or other ruling from a state court. In such cases the IRS rules take precedence for federal tax purposes. Many people find this shocking. They spent a lot of time and legal fees to get a divorce agreement in place, and they find it difficult to believe the IRS doesn’t have to adhere to it. Well, believe it, because they don’t. Marriage, divorce, and parental support of children are governed by state laws. The IRS is not.

If you want to claim all of the tax benefits for a child then you need to have custody as defined by the IRS. Your divorce arrangement may say you have “joint custody”, but if you have not met the IRS definition of custody, then you don’t have custody for federal income tax purposes.

The IRS standard is based on the number of nights the child spent with one parent or the other. Whichever parent the child spent the most nights with is the custodial parent in the eyes of the IRS. That standard resolves the majority of custody disputes for tax issues. There are additional “tie-breaker rules” for the unlikely situations in which the child(ren) spends an equal number of nights with both parents. (If you have questions about those tie-breaker rules, call me.)

Meeting the IRS custody standard enables a taxpayer to:
a. File as Head of Household
b. Claim the child for Earned Income Tax Credit
c. Claim the Child and Dependent Care Credit

These benefits are non-transferable. If you do not have custody of the child(ren) according to the terms laid out by the IRS, you cannot claim any of the above-listed benefits – even if the other parent isn’t claiming those benefits or says they don’t mind if you do. In other words, if your child(ren) lived with their other parent more than they lived with you, you are not Head of Household, you can’t use your child(ren) to claim the Earned Income Tax Credit, and you can’t claim the Child and Dependent Care Credit. The IRS rules are very clear on this.

The parent with custody will also normally have the right to claim
a. The child’s personal exemption
b. Child Tax Credit/Additional Child Tax Credit

HOWEVER, those last two tax benefits can be claimed by the non-custodial parent if the custodial parent agrees. The custodial parent can transfer these tax benefits to the non-custodial parent by filing Form 8332, Release of Claim to Exemption for Child by Custodial Parent. Form 8332 can be submitted for a single year or for multiple years. The same form can also be used to revoke a previously made release of claim.

It is not uncommon for divorced parents to legally share the tax benefits of their child(ren) either during a tax year or over multiple tax years. Parents with two or more children may agree that some of the children lived the majority of the year with one parent and some of the children lived a majority of the year with the other parent. This enables each parent to claim the non-transferable tax benefits of the children who lived with them for most of the year.

Parents of a single child can share the tax benefits over time if the child lives the majority of the year with one parent in some years and lives the majority of the year with the other parent for the other years. This would likely cause large variations in federal taxes between the years of claiming the child and the years of not claiming the child. If both parents are agreeable, however, it should be manageable with some appropriate planning.

Remember that we are dealing with federal tax law. I don’t recommend trying to be clever and claim something that isn’t true. If your return is audited the IRS may ask for evidence that your child lived with you for the majority of the year claimed. School records, day care records, medical bills, etc. is typically what they are looking for. You might have a difficult time convincing them your child lived with you here in Virginia Beach if they attended school in Santa Monica that year.

The IRS rules on this are rigid, but there is always a little wiggle room. The laws have to apply to every taxpayer, and sometimes people’s situations are not a perfect fit to the situations envisioned by the lawmakers when they were crafting the laws. If you have questions about your ability to claim a child on your tax return, please contact me.

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, and the National Association of Personal Financial Advisors. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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