If you are going through a divorce, taxes may be the last thing on your mind. In fact, child-related tax considerations are often overlooked or addressed only briefly after all substantive terms of the divorce have been addressed. There are five particularly important child-related tax exemptions that divorcing parents should know about.
Head of Household Exemption
If one parent is qualified as the “head of the household,” this status can put them in a significantly better tax bracket than if they were to file as a single taxpayer or a married person filing separately. However, to qualify as the head of household, a party must satisfy three criteria:
1) The taxpayer must be unmarried on December 31 of the relevant tax year or have lived separately from his/her spouse for at least the last 6 months of the tax year.
2) The taxpayer must pay more than half the cost to maintain the house for the relevant tax year. This would include paying property taxes, mortgage, utilities, home repairs, and insurance.
3) The taxpayer must have one or more qualifying people who reside with him or her for more than half the year. This number is calculated by the number of nights spent in one household. A qualifying person may be a child or other family member whom the taxpayer could claim as a dependent.
The dependency exemption is a deduction that is allowed in the computation of taxable income for a person who qualifies as the taxpayer’s dependent. The amount of the dependency exemption is different each year because it is adjusted for inflation. You are allowed one exemption for each person you can claim as a dependent. According to the IRS, the term “dependent” means a qualifying child, or a qualifying relative. Without an agreement or order to the contrary, a child’s custodial parent is entitled to take the dependency exemption, assuming that that parent contributed over half of the child’s support during the applicable tax year. It is important to note that if a child stays with each parent equally, the parent with the higher gross income for the calendar year is considered to be the custodial parent for tax purposes.
Child and Dependent Care Credit
If you paid someone to care for your child, spouse, or other dependent last year, you may be able to claim the Child and Dependent Care Credit on your tax return. This exemption is only available to the custodial parent and cannot be allocated or adjusted by agreement or court order. However, if the child resides with each parent for an equal number of nights, the parent with the higher gross income for the calendar year is considered to be the custodial parent for tax purposes. However, this exemption is limited to the smallest of: (1) the total amount of dependent care benefits received by the taxpayer, (2) the taxpayer’s earned income, (3) the taxpayer’s spouse’s eared income, (4) 5,000 or (5) $2,500 if married filing separately.
To qualify, the taxpayer must satisfy the following requirements:
- Such amounts must be paid for a child age 12 or younger when the care was provided. The credit is adjusted by day and can be awarded for only a portion of the year in which the child was 12 or younger.
- The care must be work-related, but can be incurred in an effort to seek employment.
- The taxpayer must have earned income, which does not include spousal and child support, unemployment compensation, dividends, pensions, or social security benefits.
- Childcare cannot be paid to the taxpayer’s spouse or to anyone 19 years or younger.
Child Tax Credit
This is another benefit for taxpayers who are eligible to claim the dependency exemption. This credit may be worth as much as $1,000 per qualifying child depending upon your income.
Higher Education Tax Credit
There are two different tax credits that could help parents of college-aged children. The Lifetime Learning Credit is a $2,000 credit for qualified tuition and related expenses for an eligible student, with no limit on the number of years that the credit can be claimed. The American Opportunity Tax Credit is a credit for qualified education expenses paid for an eligible student for the first for years of higher education. However, this tax credit is limited to a maximum of $2,500 per eligible student. It is important to note that both of these tax credits phase out at different income levels.
While child related tax issues may be the last thing to cross your mind during a divorce, it is important that they are not overlooked. It is important to talk about these issues with an attorney before you sign a final divorce decree. If you would like to speak further with a Smith Strong attorney about these exemptions, please call (804) 325-1245 or (757) 941-4298.