Parents need to be aware of the various child dependent exemptions and credits that are available to them on their tax returns and how they might be affected by a divorce settlement agreement. Most parents consider only the child dependency exemption when negotiating a divorce agreement. According to the IRS, in general it is the custodian of the child who is entitled to take the dependency exemption. The custodial parent is the parent with whom the child resides for the greater number of nights during the year. If a child spends an equal number of nights with each parent, the parent with the higher income would generally be considered the custodial parent. A noncustodial parent may take the dependency exemption if the custodial parent waives the right to the exemption. The noncustodial parent is required to attach a written declaration to their tax return from the custodial parent stating that the custodial parent will not take the child as a dependent for the taxable year. Make sure to get expert tax advice on the rules regarding waiving the exemption – some agreements specify that the noncustodial parent is entitled to take the dependency exemption only if he or she is current on their child support obligation for that year; however, check the IRS rules and regulations to make sure as to whether such conditions or contingencies are allowed (they may not be).
A parent can take the Dependent Care Credit, Child Tax Credit, and College Tuition Credit ONLY if they are also claiming the child as a dependent on the tax return. Therefore, a parent who waives the dependency exemption also waives the Dependent Care Credit, Child Tax Credit, and College Tuition Credit. Parents must consider this when discussing waiver of the dependency exemption as a parent might unknowingly waive the rights to several tax credits when they thought they were waiving the right to only the dependency exemption. Further, a noncustodial parent may agree to pay for a child’s college education thinking that they would be entitled to take the College Tuition Credit but if the child is not listed as a dependent on their tax returns they cannot take that credit.
Is is very important to consider all of the tax credits and exemptions regarding children when negotiating a divorce settlement agreement, and parents should seek competent and specialized tax advice from tax professionals regarding these matters.
