Dependency Exemptions: Divorce
What is a child dependency exemption?
If a separated or divorcing couple has children, an important tax decision involves assignment of the child dependency exemption. Exemptions are fixed amounts that you subtract from your adjusted gross income (AGI) to calculate taxable income. You can deduct $4,050 for each exemption you claim (for 2016 and 2017). Along with personal exemptions, you’re generally allowed one exemption for each person you can claim as a dependent. To claim a dependency exemption, you must first have a “qualifying child” or a “qualifying relative.” In making this determination, special rules apply to separated or divorced parents. For purposes of this discussion, it is assumed that the child is a “qualifying child” of one or both parents and not a “qualifying relative.”
For more information on the dependency exemption, including the tests to determine who is a “qualifying child” or a “qualifying relative,” see IRS Publication 501 titled Exemptions, Standard Deduction, and Filing Information.
Who can claim the child dependency exemption?
Assuming you have a child who is under age 19 at the end of the year (or a full-time student under age 24 at the end of the year, or a child who is permanently and totally disabled at any time during the year, regardless of age), the general rule for separated or divorced parents is that the custodial parent (the one with whom the child lived for the greater part of the year) is typically the one who claims the dependency exemption, regardless of how much support was provided by each parent.
Frank and Liz separated in May. Their daughter, Carol, lived with Liz for the rest of the year, but Frank provided all the financial support for Liz and Carol that year. Because Carol lived with Liz longer than she lived with Frank, Liz may claim the dependency exemption, despite the fact that she made no actual financial contribution toward Carol’s support.
What are the exceptions to the general rule?
There are exceptions to the general rule that the custodial parent is the one who claims the dependency exemption. Specifically, a child will be treated as the “qualifying child” of the noncustodial parent if one of the following conditions is met:
- The custodial parent must sign a written declaration that he or she will not claim the exemption for the child for the tax year, and the noncustodial parent must attach this declaration (IRS Form 8332) to his or her tax return (if a divorce or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may be able to attach certain pages from the decree or agreement in place of IRS Form 8332), or
- A qualified pre-1985 instrument between the parents must provide that the noncustodial parent can claim the child as a dependent (the noncustodial parent must also have provided at least $600 for the support of the child during the year).
Does the child dependency exemption affect your ability to claim the child-care credit?
A custodial parent who pays dependent child care expenses so that he or she can work may be eligible for a tax credit for a portion of those expenses — up to 35 percent, depending on income. The qualifying expenses on which that percentage is based are limited to $3,000 for one qualifying dependent, or $6,000 if there is more than one qualifying dependent. To claim this credit, the parent must maintain a household that is the home of at least one dependent, and the day-care expenses must be paid to someone who’s not claimed as a dependent.
Only the custodial parent is entitled to claim the child and the dependent care credit. This is true even if the custodial parent doesn’t claim the dependency exemption for the child. A noncustodial parent may not claim a child care credit for expenses incurred even if that parent is entitled to claim the exemption for the child.
Assume John and Mary have a son, Benny, who lives with Mary four days a week and with John three days a week. John and Mary are both singers and work outside the home. Each parent pays half of the $4,000 per year that it costs to keep Benny in day care during the week. Mary is entitled to claim a child-care credit for her share of the day-care expenses; John is not entitled to claim his portion. She is considered the custodial parent because Benny spends a greater portion of time with her than with his father.