Posted by Rachel Roan, CPA, MT
All may be fair game in love and war, but when it comes to divorce and separation, very specific rules apply — at least in the tax code. Beyond the family dynamic at issue, questions about who can claim a child or who can benefit from certain tax deductions and credits often come into play. Below is an overview of some of the most pressing tax issues to consider after a divorce or separation.
Generally the custodial parent is the taxpayer who can claim the child on their tax return. The custodial parent is the one with whom the child lived with for the majority of the year. However, a noncustodial parent can claim the child as a dependent, instead of the custodial parent, IF:
If both child lives with both parents an equal amount of time, then the Tiebreaker Rules will apply for qualifying children:
What happens if both parents claim the same child?
Alimony is the collection of payments made to a former spouse under a divorce or separation agreement. Alimony is deductible by the payer and is included in income by the receiving spouse.
Child support is a court-ordered payment typically made by the noncustodial parent to help support the financial needs of the child. Child support is not deductible by the payer and cannot be included as part of the receiving spouse’s income.
Child Tax Credit
The Child Tax Credit is a credit for people who have a qualifying child; the credit can be up to $1,000. To qualify for the credit you must have a qualifying child who:
Noncustodial parents may claim this credit if the custodial parent releases the dependency exemption to the noncustodial parent, even if the child did not live with this parent for more than half of the year.
The Child Tax Credit may be limited by your AGI. For single and head-of-household filing individuals, the phase-out begins at $75,000 and is limited to no more than the taxpayer's total tax liability including AMT.
Child and Dependent Care Credit
The Child and Dependent Care Credit is available to parents who pay expenses for the care of a qualifying individual under the age of 13 while working or looking for work:
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a credit for low- to moderate-income individuals with earned income. Only the custodial parent can use the child to qualify for the EITC. The EITC rules do not have exceptions for the residency requirement; children must live with you for more than half of the year to qualify as a qualifying child.
Selecting head of household on your individual tax return, compared to filing as a single filer, can provide lower tax rates to unmarried taxpayers who pay for more than half the cost of maintaining the home for the filing year and have a qualifying person living with them for more than half of the year. A qualifying child or relative claimed as an exemption will count as a qualifying person.
It’s clear that an individual’s tax situation changes as a result of divorce and separation, as it often does during and after any major life event. Consult with your tax team to help ensure you are complying with the tax code and maximizing your tax opportunities.
Contact Rachel Roan at rroan@cohencpa.com or a member of your service team for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.