Goodbye To The Child Dependent Tax Credit?

child choose custodial parent

One source of argument in any divorce case involves what the Internal Revenue Service calls the dependent tax exemption. Parents would fight over the right to claim one or more of the children as a dependent for tax purposes because the dependent exemption reduced taxable income by a sizable amount – $4,050 for each child. Depending upon one’s income and the number of children, that exemption alone could save thousands of dollars in income tax.

With the passage of the new tax law last December, Congress made these exemptions non-existent until 2025. So, do parents still have to fight over claiming the children?

To answer that question, we first need to see what the new tax law put in place of the dependent exemption.

The new tax law increases the standard deduction for an individual to $12,000 and to $18,000 for head of household. Thus, while the ability to reduce tax at the rate of $4,000 a child no longer exists, the ability to reduce tax by $6,000 regardless of the number of children does exist – and for many families that could mean a great deal.

Who gets the head of household exemption?

Under the IRS definitions, the person who has custody of the child for more than half of the year. If the parent paying child support does not have the child for more than half of the year, that parent could not take advantage of the head of household status unless the court orders the exemption go to that parent.

Essentially, the IRS wants to avoid a child being claimed twice, i.e. by more than one parent or custodian. But who should get that right from an economic point of view may differ from the way the IRS defines it.

Why? Because every household is different financially – not only in terms of income but in terms of available deductions. Does one parent have a mortgage? Who makes charitable deductions? Who bears most of the child’s medical expenses?

If a family, even divorced, thinks of itself as one financial unit with a gross family income, the family can maximize its income through smart choices in allocating exemptions.

For example, if one spouse would receive a significant tax refund by claiming the head of household status, that refund increases the overall family income. If a family knows this will occur on a regular basis, the family should assign that exemption to the parent who most benefits, even if it is not the custodial parent under the IRS definition.

The dependency exemption could be a bargaining tool in arriving at an appropriate level of spousal support. Now that the new tax law no longer allows maintenance as a deduction for income tax purposes, a spouse may not have the ability to pay as much in maintenance.

However, if both spouses work together to arrive at an acceptable amount when considering the tax refund available through allocating the head of household status, it might lead to a much more affordable sum for both spouses – one gets more support, one has more ability to pay for it.

Even with the changes in the tax law, it is still vital that divorcing spouses consider the impact of dependent status in reaching a settlement agreement.

If you have more questions about the dependent child exemption and the new tax law, contact us – we can help.

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