by Dawn E. Wellman December, 2012
Many of our clients are divorced or contemplating a divorce in 2013 and are interested in preserving the tax benefits their minor children provide as dependents. I thought it would be helpful to set out some of the laws and Internal Revenue Code provisions which are important to consider when determining the economic benefit to both the mother or the father of the use of the exemption. First, if you are not the custodial parent, the only way that you can claim any of your children as dependents is if there is a specific order requiring your ex-spouse to waive their right to claim the exemption. If the decree or settlement agreement is silent as to how the exemptions are to be divided, the custodial parent, pursuant to the Internal Revenue Code, is permitted to claim the exemption.
If you are entitled by a court order to claim a child or children for exemption purposes but you are not the custodial parent, your ex-spouse must sign IRS Form 8332 to allow you to claim the exemption(s). You can either obtain the form on-line or request one from our office.
It becomes more complicated when the parents share physical custody and the overnights for the children are exactly the same in both houses. If, in fact, the agreement does not designate who is to receive the exemption, the parent with the higher adjusted gross income will be given the exemption by the IRS.
To be eligible for the child tax credit (which is $1,000.00 per child under the age of 17), you must first claim the dependency exemption to be eligible. However, the dependency exemption can also be released and the $1,000.00 can be utilized by the other parent. If you are filing as head of household, you must have income under $75,000 to be able to claim it or jointly adjusted gross income must be less than $110,000. The child and dependent care credit is only available to the custodial parent. You are allowed to claim up to thirty-five percent (35%) of $3,000.00 for 1 child or $6,000 for two 2 children. You do not have to claim the dependency exemption in order to claim the child and dependent care credit. Non-custodial parents cannot take any expense they pay for daycare as a deduction even if they take the dependency exemption. Childcare expenses may only be deducted by the custodial parent.
Another child tax related benefit is the earned income credit, but again only the custodial parent is eligible. The maximum credit is $5891for 3 children or more, $5236 for 2 children and $3,169 for 1 child. You are not required to take a dependency exemption to be able to claim the EIC.
As to college expenses, under the American Opportunity Education Credit the maximum credit is $2,500 per student and it is only available the first 4 years of college. The credit follows the dependency exemption regardless of who pays the expense. The Lifetime Learning Credit is available for unlimited numbers of years and the maximum credit in 2011 was $2,000. This credit also follows the dependency exemption regardless of who pays the expense.
Reading the first few paragraphs of this article would lead one to believe that fighting for the dependency exemption is worth it because of all of the other types of credits one can take. However, the child tax credit and the earned income credit are phased out if you earn $36,921 or more for 1 child, $41,952 for 2 children and $45,060 for three 3 children, and you must not have more than $3,200 in investment income in order to claim any of the earned income credit.
Our attorneys offer creative and innovative ways to attempt for the wage earner to take advantage of these credits even though they may not be calculated on their tax returns in any given year. Please contact any of the attorneys at Allen Wellman McNew Harvey, LLP who regularly handle divorce matters to see if there is a way that you can take advantage of these exemptions in 2013.