Custodial and Non-Custodial Tax Breaks
Divorce comes with many consequences. One consequence can be tax responsibilities. If there are children involved, who gets the related custodial tax breaks? The answer to that often rests upon who is allowed to claim the child as a dependent.
In general, for tax-related purposes, the custodial parent is the parent with whom the child resides for the greater part of the year. The other parent is the non-custodial parent. The usual rule is that only the custodial parent may claim the dependent exemption deduction. However, there is an exception that allows the custodial parent to allow the noncustodial parent the right to claim the child as a dependent.
In order to be able to use this exception to the rule certain conditions must be met.
- Support Requirement – Over half of the child’s support for the year must be supplied by one or both parents.
- Divorced or Separated Requirement – The parents must be divorced or separated under a written agreement at the end of the year or have lived apart for the last six months of the year.
- Custody Requirement – The child must be in the custody of the one or both parents for over half the year
- Written Declaration Requirement – The custodial parent must sign a written declaration releasing to the noncustodial parent the right to claim the designated child as a dependent for a year.
When all of the above conditions are met, the noncustodial parent becomes eligible for the tax breaks listed below. Only one parent can claim these tax breaks.
- Dependency Exemption Deduction: $4.050 for the year 2016.
- Child Tax Credit: This credit is worth up to $1,000 for each eligible child.
- Higher Education Tax Credits: The American Opportunity credit can be worth up to $2,500 during the first four years of a child’s college education. The Lifetime Learning credit can be worth up to $2,000 and it can cover just about any higher education costs.
- Student Loan Interest Deduction: This deduction can be worth up to $2,500 for qualified student loan interest expense paid by the noncustodial parent.
- Tuition Deduction: This deduction can be worth up to $4,000 for higher education tuition and mandatory enrollment fees. As with other deductions, it can go down as income level rises.
Also keep in mind that there are tax breaks available for both the custodial and the noncustodial parent available every year.
- Itemized deductions for the child’s medical expenses
- Tax-free employer-provided benefits for the child
- Tax-free health savings account (HSA) distributions to cover the child’s medical expenses
It also is important to keep in mind that there are certain deductions that only the custodial parent may claim. These include:
- Head of Household Filing Status: The standard deduction for filing as head of household is higher and the income levels are a bit looser
- Earned Income Tax Credit: In the year 2016, this credit can be worth $3,373 for one child and goes up to $6,269 for three or more children
- Child Care Tax Credit: This is based on the custodial parent’s income, but can go as high as $600-1,050 for one child and $1,200 to $2,100 for two or more.
The rules laid out here can be confusing even to tax professionals. If you are in need of more information, IRS Publication 504 (Divorced or Separated Individuals) is available at the IRS website. We also recommend speaking with an accountant. Hiring an accountant experienced in handling divorces and tax breaks is recommended for at least the first few years after a divorce . You don’t want to pile IRS trouble on top of all of the stress of a divorce.