Tax season is around the corner, and with it the question arises: Who will claim the kids? Only one parent may claim the child(ren) as dependents. Many factors should be considered when determining who will take the tax exemption.
Typically the IRS presumes the parent who has provided more than 50% of the financial support for the child (also presumed to be the custodial parent) is entitled to the exemption. When both parents provide an equal amount of financial support (a true 50/50) this standard doesn't work. In some circumstances a non-custodial parent may claim their child(ren). Parties might agree to and designate the exemption differently from the IRS presumption, using their divorce decree or settlement agreement reached during mediation, despite the division of support.
A few IRS rules apply to a non-custodial parent claiming the exemption: (1) The non-custodial parent must be current on all child support obligations. IRS Rule 203 allows for the reduction of any refund for the payment of past due child support. (2) The non-custodial parent's child support for the year must equal no less than $600. (3) The non-custodial parent should file either Form 8332 (preferred) or a copy of the divorce decree or settlement agreement giving the non-custodial parent the right to claim the child(ren) as deductions. For further details, refer to the IRS website. Aside from adhering to these basic rules, parties might assign the right to claim the child(ren) to whichever parent they agree on, or whichever party is chosen by the court.
Who will receive the greatest benefit from the deduction? One parent may make significantly more than the other parent, and therefore benefit financially more from taking the deduction for the child(ren). When parents’ income differs greatly, the solution might involve both parents calculating their individual tax obligation and benefit in two ways: one with claiming the exemption for the child(ren) and one without. This option will involve disclosing your tax filings with your former partner/co-parent. Having this information available, both parties can then determine who will receive the greatest benefit by claiming the exemption.
The parent who would receive the least benefit can then assign the right to claim the deduction to the other party by signing IRS Form 8332. To reimburse the relinquishing party for the benefit they are forgoing, the claiming parent agrees to pay out the amount the relinquishing parent would have received in benefit if claiming the child(ren). For example, if dad’s tax liability would be reduced by $3,000 if he claims the kids and mom’s tax liability would be reduced by $5,000 if she claims the kids, then mom would claim the deduction and pay dad $3,000. Dad is not out anything for allowing mom to take the deduction, and mom pays less in taxes by claiming the exemption. This is called “buying out”. Buying out can result in a better tax outcome for both parties.
The parent who would receive the least benefit can then assign the right to claim the deduction to the other party by signing IRS Form 8332. To reimburse the relinquishing party for the benefit they are forgoing, the claiming parent agrees to pay out the amount the relinquishing parent would have received in benefit if claiming the child(ren). For example, if dad’s tax liability would be reduced by $3,000 if he claims the kids and mom’s tax liability would be reduced by $5,000 if she claims the kids, then mom would claim the deduction and pay dad $3,000. Dad is not out anything for allowing mom to take the deduction, and mom pays less in taxes by claiming the exemption. This is called “buying out”. Buying out can result in a better tax outcome for both parties.
Equal Division of the Kids
When sharing an even number of children, parties might elect to divide the exemptions. For example, if Joe and Melanie share two children (Zoey and Jane), Joe will claim Jane and Melanie will claim Zoey. This division works well, as long as both children are under 18 and parents make similar incomes. This arrangement will need to be modified when one child is no longer an eligible dependent.
When sharing an even number of children, parties might elect to divide the exemptions. For example, if Joe and Melanie share two children (Zoey and Jane), Joe will claim Jane and Melanie will claim Zoey. This division works well, as long as both children are under 18 and parents make similar incomes. This arrangement will need to be modified when one child is no longer an eligible dependent.
Alternating the Exemption
Parents may wish to alternate the right to claim the child(ren), giving mom the even years and dad the odd years, or vice versa. This is an equitable option when both parents make similar incomes. Variations on this might also work. If mom has gone back to school and has less income now, but she anticipates more income in the future, she may assign the benefit to dad for the next five years. He then assigns the benefit to her for the five years following, and then they alternate yearly after that.
Parents may wish to alternate the right to claim the child(ren), giving mom the even years and dad the odd years, or vice versa. This is an equitable option when both parents make similar incomes. Variations on this might also work. If mom has gone back to school and has less income now, but she anticipates more income in the future, she may assign the benefit to dad for the next five years. He then assigns the benefit to her for the five years following, and then they alternate yearly after that.
Like many things in family life, there is not a one-size-fits-all solution. The most equitable solution is one agreed to by you and your co-parent that you both feel good about and are committed to. Take the time to sit down and agree on how you will share this exemption, and save some stress come tax time.
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