Children can save their parents some significant money at tax time. As of 2012, each child who qualifies for a dependent exemption takes $3,800 off your taxable income. Beyond that, your children can help you qualify you for several tax credits, which is especially advantageous. Credits come off the amount you owe the Internal Revenue Service after you calculate your tax bill. It's logical that both parents want to keep these tax benefits when they divorce. Unfortunately, only one of them can do so.
The Dependent Exemption
Unless they're married, only one parent can claim each child as a dependent for tax purposes. Post-divorce disputes as to which parent has this right arise often enough that the IRS has established "tiebreaker" rules. In order to claim your child, he must have lived in your home for at least half the tax year. This typically means you're the custodial parent. However, the IRS allows you to waive the right to the dependent exemption and give it to your ex-spouse instead, even if your child spent less than six months' time in his home. You can sign Form 8332 so your spouse can submit it with his tax return. In addition to the tiebreaker rules, your child must meet other requirements to be your qualified dependent. He must be younger than 19, although if he's a full-time college student, this age is extended to 24. There's no age limit for disabled children. Your child's own earnings can't contribute more than 50 percent to his own living expenses.
The Child Tax Credit
Being able to claim your child as a dependent is important, because your eligibility to claim tax credits usually depends on it. Only the parent who takes the dependent exemption can claim the child tax credit for that child, and this credit can amount to as much as $1,000. The child tax credit is also transferable between parents; you can give both the dependent exemption and the credit to your ex-spouse by signing Form 8332. Income limits apply to the child tax credit, however, so it's not a great savings for all parents. It phases out for taxpayers with higher adjusted gross incomes.
Earned Income Tax Credit
The federal government created the earned income tax credit to help low- and moderate-income families. If you've got significant earned income, you may not qualify for the EITC, and your marital status would have little to do with it. If you are eligible, this credit goes to the parent with whom the child spent the most overnights during the tax year. You can't transfer this credit to your ex-spouse at tax time because you can't retroactively go back and change who your child lived with most of the time. The amount of the EITC varies, depending on your income and how many children you're supporting.
Child and Dependent Care Credit
Like the earned income tax credit, only the custodial parent can claim the tax credit for child care costs. The child and dependent care credit goes to the parent with whom the child lived most during the tax year. It's not transferable and it only applies to children under the age of 13 who require caregivers while their parent goes to work or looks for a job. The IRS assumes that children older than 13 are capable of caring for themselves. Your income can affect this tax credit as well. It phases out as you earn more.
If your child attends college and you pay the tuition, you might be eligible for the American Opportunity credit or the Lifetime Learning credit. The American Opportunity credit can take up to $2,500 off your tax bill, although it phases out at higher income levels. You can't claim it if your modified adjusted gross income exceeds $90,000. You must claim your child as a dependent to be eligible. The Lifetime Learning credit is equal to a percentage of the first $10,000 you spend on your child's tuition and related qualified expenses, and it also phases out at higher income levels.
- IRS: Divorced and Separated Parents
- IRS: Personal Exemptions and Dependents
- IRS: Publication 972
- Bankrate: IRS Can Help You Look after the Kids
- IRS: In 2012, Many Tax Benefits Increase Due to Inflation Adjustments
- IRS: American Opportunity Tax Credit – Questions and Answers
- FinAid: Lifetime Learning Tax Credit
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.