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The earned income credit is a refundable tax credit for families and individuals with low and moderate incomes. To qualify, taxpayers must have a source of earned income for the year. The amount of the credit varies, depending on income and number of children claimed. When parents divorce, taxes can get complicated. Although both parents can claim certain credits, only the custodial parent can claim the EIC.
A custodial parent can give the noncustodial parent permission to claim a dependent child by completing IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. With the release, the noncustodial parent may receive certain tax breaks, including the dependency exemption deduction, child tax credit, higher education credit, student loan interest deduction and tuition deduction. A noncustodial parent is not eligible for the EIC.
Qualifying Child Test
If the custodial parent is not claiming the child as a dependent for the year, she may still be entitled to receive the earned income credit, provided the child meets the qualifying child criteria. In cases of shared parental custody, each parent will need to determine if the child meets the IRS rules for a qualifying child. A qualified child is the son or daughter, stepchild, adopted child, foster child, descendant, sibling, half sibling, or stepsibling of the taxpayer. The child must be under age 19, a full-time student under 24, or permanently disabled. If the child meets these requirements, the custodial parent is the one the child lives with for more than half the year.
Sometimes there are discrepancies when parents share custody or if the parents lived together during the year. When a child passes the qualifying test for both parents, the parents can decide which one will claim the credit. However, if the parents cannot agree, the IRS will make the decision using tiebreaker tests. The IRS checks to see if one person is the child's parent. For example, if one is a stepparent, the parent gets the credit. If both are the parents, the IRS gives the credit to the taxpayer with the highest adjusted gross income.
Parents cannot split a credit. However, if there is more than one qualifying child, each parent can claim a child to receive the credit. A parent who cannot claim a child may still qualify for the EIC. As of 2012, an individual with an income of $13,980 or less can claim the credit. Without qualifying children, the maximum value of the credit is $475.