November 1, 2015
One component of a divorce plan is to decide which parent will claim the child(ren) on their tax return. Let’s look at why this decision is important.
Every taxpayer is entitled to take a deduction for themselves, their spouse and any dependent children under age 19 (or as old as 24 if the child is a full time student.) This is called the “personal exemption.” When a couple divorces only one spouse can claim this deduction for each child even though both parents may contribute to the care of the child. According to the IRS that parent is the one with “custody”, which means they house the child more than 50% of the time. Even if parents share the parenting equally the calendar year has an odd number of days so one parent must house the child for at least one day more than the other parent. That is the “custodial” parent to the IRS. (In reality it is usually much easier to determine which parent has primary care.)
Although the IRS has a default rule for taking the dependent exemption, they allow the custodial parent to relinquish this right and give the exemption to the other spouse. As long as this right is included in the divorce decree the custodial parent can file Form 8332 with their tax return relinquishing the right to the other parent. This can be done as often as the parents choose – every year if they wish. And it can be done for one child or all children selectively.
In 2015 the exemption is $4,000. That amount is deducted from “Adjusted Gross Income” along with either the standard deduction or itemized deductions, after which taxes are calculated. So this exemption helps to reduce the taxable income. Theactual savings depends on what tax bracket the parent falls into: if a parent is in the 25% tax bracket, taking this deduction will save them $1,000 in federal income tax ($4,000 x 25%). The higher the tax bracket, the more the savings.
It is a good idea to look at the estimated tax situation of each parent post-divorce. By allowing the higher-income parent to claim the personal exemption for the children there is more after-tax income that can be used for child support or spousal support, as well as to cover their own expenses. In addition if one spouse is in a very low tax bracket, or even pays no federal income tax, claiming exemptions for the children could be a waste of a good deduction. Try to help your client see that maximizing the after-tax income of each party could benefit both of them.
