While no one enjoys paying taxes, having children means that most parents will receive a sizeable income tax return every April. While married parents have the opportunity to claim these tax benefits together, parents who are divorced will have to decide which parent will claim the exemptions and credits offered by the federal government each year.
Each year, parents are allowed to take a tax exemption for every child who is a dependent on their joint tax return. After a divorce, only one parent is allowed to take this exemption. In most cases, the custodial parent—meaning the parent with whom the child resides for more than half of the year—is the only parent who will be able to claim the exemption.
In some instances, the custodial parent may agree to waive the right to take this exemption. For example, the right to claim the children as exemptions could be negotiated as part of the divorce settlement. In order to waive the right to the exemption, the custodial parent will have to sign a waiver that is submitted to the IRS. However, it is important to remember that even if the custodial parent signs such a waiver, the child must still be considered a dependent of the non-custodial parent according to the IRS’ standards.
Tax credits are different than exemptions, and the right to take a tax credit cannot be waived or transferred by the custodial parent. For instance, the IRS allows only the custodial parent to take advantage of things like the head of household filing status, the child tax credit, the earned income credit, and credits for childcare expenses.
Important Tax Considerations
No one wants to be audited by the IRS. When filing taxes, it is important to make sure that you and your ex-spouse know who will be using the exemptions for the year, and which spouse is the custodial parent. If both parents claim an exemption, the IRS will almost always begin an investigation.
Additionally, parents must remember that child support is neither considered income nor a deductible expense. The parent who pays child support cannot deduct that amount from his or her taxes, and the parent who receives child support does not add that money to his or her income.
When dividing property in a divorce settlement, these tax considerations can be worth several hundred dollars per year. For parents who are sharing custody relatively equally, these exemptions are often an important bargaining tool.
Creating a fair child support arrangement and parenting plan takes skill and experience. At Ashby Law, our attorneys understand how these agreements will affect your taxes in the future, and will help you negotiate a divorce settlement that is fair for both you and your children.
To schedule a consultation, or to learn more about how your divorce may affect your taxes, contact us today by calling 509-572-3700.