Divorces cause tax issues, including which parent is allowed to claim valuable child-related tax breaks. Sometimes, but not always, it depends on which parent is allowed to claim the child as a dependent even though the Tax Cuts and Jobs Act (TCJA) eliminated child dependency deductions for 2018-2025. Confusing? You bet. But with the following FAQs and answers, we will dispel the confusion. We hope. Here goes.
Are you the custodial parent or the noncustodial parent?
For tax purposes, a child is usually treated as “belonging” to the parent who has custody for the greater part of the year. That parent is called the custodial parent. The other parent is called the noncustodial parent.
The general rule says that only the custodial parent can claim most child-related tax breaks. However an exception allows the custodial parent to release to the noncustodial parent the right to claim these breaks by treating the designated child as a dependent of the noncustodial parent. I call this exception the noncustodial parent rule. As you will see, it’s an important tax-saving provision for all you noncustodial parents out there.
What is the noncustodial parent rule?
Under the noncustodial parent rule, the designated child is treated as a qualifying child of the noncustodial parent if all the following requirements are met.
Over half the child’s support for the year must be provided 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 during the last six months of the year.
The child must be in the custody of 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 the year. To meet this requirement, the custodial parent should sign IRS Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent). The noncustodial parent must then attach a copy of Form 8332 to his or her Form 1040.
What tax breaks can the non-custodial parent claim?
When all the preceding requirements are met, the noncustodial parent is eligible for the tax breaks listed below, based on the designated child. (Correspondingly, the custodial parent is ineligible.)
Generous tax credit for under-age-17 child
For 2018-2025, the TCJA increased the maximum child credit to $2,000 per qualifying child (up from $1,000 under prior law). Up to $1,400 can be refundable, meaning you can collect it even when you don’t owe any federal income tax. Under the TCJA, the income levels at which the child tax credit is phased out are increased to $200,000 or $400,000 for married joint-filing couples, so many more families now qualify for the credit.
Smaller tax credit for over-age-16 child
For 2018-2025, the TCJA established a new $500 tax credit that can be claimed for a dependent child (or young adult) who is not under age 17. However a child in this category must also pass an income test to qualify you for the $500 credit. According to IRS Notice 2018-70, your over-age-16 child passes the income test for 2019 if his or her gross income does not exceed $4,200.
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 covers just about any higher education tuition costs. Both credits are phased out as the noncustodial parent’s income goes up, but the Lifetime credit is phased out earlier.
Student-loan interest deduction
This deduction can be up to $2,500 for qualified student loan interest expense paid by the noncustodial parent, subject to phase-out for higher-income parents.
Key Point: When the noncustodial parent rule isn’t in effect for a child, the preceding tax breaks are off limits for the noncustodial parent, but they can usually be claimed by the custodial parent.
What tax breaks are available to both parents?
Whether the noncustodial parent rule applies or not, the noncustodial parent can usually claim the tax breaks listed below as long as the first three noncustodial parent rule requirements are met (the support requirement, the divorced or separated requirement, and the custody requirement). The custodial parent can also usually claim these breaks.
* Itemized deductions for the child’s medical expenses paid by the parent.
* Tax-free employer-provided healthcare benefits for the child.
* Tax-free health savings account (HSA) distributions to cover the child’s medical expenses.
What tax breaks are only allowed to the custodial parent?
The noncustodial parent cannot claim the following breaks based on a child to whom the noncustodial parent rule applies. The custodial parent can claim them if he or she meets the applicable tax-law requirements.
Head of household (HOH) filing status
Filing as an HOH is better than filing as a single taxpayer, because the standard deduction is bigger and the tax brackets are looser.
Earned income tax credit
For 2019, this credit can be worth up to $3,526 for one qualifying child, $5,828 for two kids, and $6,557 for three or more. The credit is phased out as the custodial parent’s income goes up.
Child care tax credit
This credit can range from $600 to $1,050 for one qualifying child; $1,200 to $2,100 for two or more — based on the custodial parent’s income.
Tax-free child care assistance
This break allows up to $5,000 in annual federal-income-tax-free reimbursements for the custodial parent’s qualified childcare expenses under an employer-sponsored dependent care flexible spending account (FSA) arrangement.
For more information
The rules I’ve explained here are not so easy to understand, even for tax pros. For more information, check out IRS Publication 504 (Divorced or Separated Individuals) at www.irs.gov. Also see my earlier column about kids and taxes here.