There are important tax related decisions that need to be made during the divorce process. One of those decisions is determining who gets to claim the children on their tax return. It can affect both the filing status and potential tax benefits. Here is how it typically works and what factors come into play.
Tax Filing Status
One of the key aspects of claiming children on your tax return is your filing status. If you are the parent with whom the child spends the most time, you qualify to file as the Head of Household. This status offers more favorable tax brackets, and a higher standard deduction compared to filing as a single person.
To qualify as Head of Household, the child must live with you for more than half of the year. This is often referred to as the “pillow test,” where the parent with whom the child spends slightly more time can claim this status. In cases where parents want to share custody “equally”, it will mean that the allocation is not a perfect 50/50 split, it might be a 51/49 split.
Dependency Exemption
The dependency exemption, although currently suspended through 2025 due to the 2017 tax law changes, still plays a role in determining eligibility for other tax benefits, such as the Child Tax Credit. The parent who qualifies as the custodial parent (the one with whom the child resides for the greater part of the year) generally has the right to claim the child as a dependent.
However, there are situations where the non-custodial parent may claim the child if the custodial parent agrees. This is done by filing IRS Form 8332, where the custodial parent releases the right to claim the dependency exemption to the other parent.
Strategic Decisions
There can be cases where it is financially advantageous to transfer the dependency exemption from the parent who spends more time with the child to the other parent. The benefit of releasing the exemption depends on the parents’ income levels, tax brackets, and eligibility for certain credits. For example, if one parent would receive no financial benefit from claiming the child due to their higher income level, it might make sense to release the exemption to the other parent, ensuring the family collectively retains more after-tax income.
Impact on Child Support
The tax benefits of claiming a child also influences the child support calculations. State guidelines take into account the tax liabilities of each parent. If one parent pays less tax due to claiming the child, this could potentially adjust the amount of child support owed, ensuring a fair allocation of financial responsibility.
The Ultimate Goal
Determining who gets to claim the children on their tax return after a divorce involves a combination of legal guidelines and strategic financial planning. The primary goal is to achieve the best financial outcome for both parents and their children, taking into account tax benefits, child support, and overall household income. Consulting with a tax professional or a divorce financial analyst can be helpful in making informed decisions tailored to your specific situation.
Lisa R. Murray is an experienced attorney in the Collaborative Divorce and Mediation processes. She can help you determine the goals for a separation agreement or a divorce. She can be reached at 650-642-3897.