The U.S. Congress loves children. Over the years, it has come up with countless ways to provide special tax benefits to parents. That becomes a problem in divorce.
Married couples jointly benefit from the tax breaks, but those benefits cannot be claimed twice just because a couple breaks up. As a result, tax breaks have become another issue to resolve during a divorce.
Tax breaks for a dependent
First, let’s review why you would want to claim a child as a dependent. The tax code provides an exemption of roughly $4,050 for every dependent. That means if you earned $50,000, you can reduce those earnings to only pay taxes on $45,950. If you are taxed at 25%, that will save you about $1,000.
There is also a child tax credit worth about $1,000 for many taxpayers, though it can change annually and gets phased out for higher earners. Expanding this credit was an important component of the 2017 tax reform bill.
There are also benefits for child care that can be rather complex but can save hundreds of dollars. A number of other breaks benefit parents, though not all directly.
Perhaps the biggest prize is the Earned Income Tax credit. This credit is can be especially lucrative, but it is focused on low-income working people. It can increase with the number of children you have, but it phases out and is unavailable to most middle-class workers.
It is also not limited to parents, though it benefits parents the most. The maximum a person can receive with no children in 2018 is $519, while someone with one child can get $3,461 and someone with three children can get $6,431.
The Internal Revenue Service has rules for pretty much every conceivable situation, but for most people, it is easy to determine if a child can be a dependent. The child generally must be younger than 19 (and younger than you) or under 24 and going to college. In other words, the child has to be in college, or high school age or younger.
Disabled children can be dependents at any age. The child tax credit has special rules requiring the child to be 17 or under.
Splitting the tax benefits
The IRS has strict rules on this situation. Frankly, the agency does not want to deal with complications from your divorce. One parent generally must claim all of the benefits. That means you and your spouse cannot agree to split things up, by one of you taking the child care breaks and the other taking the exclusion or something.
If you and your ex both try to claim your child, the IRS will be forced into choosing who should get the benefits. They will award the benefits to the parent who the child lived with for the longer period of time during the year.
If the time was about the same, the IRS will treat the child as belonging to the parent with the higher income. If nobody claims a child, the IRS will assign the child to the highest earner that could have claimed the child.