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August 21, 2025

Navigating Child Tax Credits in Divorce

Divorce or separation can lead to significant emotional and familial changes, but it also introduces intricate financial complexities, especially when children are involved. A critical issue often arises concerning which parent is entitled to claim children for tax purposes. The decision directly affects who benefits from various child-related tax credits.

Understanding Dependent Qualifications - To claim a child as a dependent, the following “qualifying child” requirements generally apply:

Relationship Test: The child must be your son, daughter, stepchild, foster child, or a descendant (e.g., grandchild) of any of them. Alternatively, the child could be your brother, sister, half-brother, half-sister, or a descendant (e.g., niece or nephew) of any of them.
Age Test: The child must be under the age of 19 at the end of the year and younger than you (or your spouse if filing jointly). If they are a student, they must be under age 24 and younger than you or your spouse, or they can be any age if permanently and totally disabled.
Residency Test: The child must reside with you in the U.S. for more than half of the year.
Joint Return Test: The child must not be filing a joint tax return for the year unless it is only to claim a refund.

Furthermore, a student must be enrolled as a full-time student for at least five months in the year at an accredited institution, not limited to exclusively online or correspondence schools.

Custody and Implications on Taxes

Custodial Parent: This parent, with whom the child spends more nights during the year, typically claims the child’s dependency. Tax law grants this parent access to several benefits like the Child Tax Credit and the Earned Income Tax Credit (EITC).
Joint Custody: When custody is equally shared, only one parent can claim the child. The IRS employs tiebreaker rules if both parents attempt to claim the child.
Family Court vs. IRS Rules: Tax rules override family court decisions regarding dependency claims. Generally, the IRS dictates that the custodial parent, unless they relinquish the claim, has the right to tax-related benefits.

IRS Tiebreaker Rules - The IRS provides specific guidance when parents cannot agree on who claims the child:

The parent with whom the child resided for more nights during the tax year gets the claim.
If nights are equally split, the parent with the higher adjusted gross income (AGI) may claim the dependent.

Key Tax Benefits and Credits

Child Care Credit: Exclusive to the custodial parent, it covers childcare expenses enabling the parent to work or seek employment, for children under age 13 or disabled. The non-custodial parent cannot claim this, regardless of any dependency claim release.
Child Tax Credit: By claiming the child as a dependent, a parent can receive up to $2,000 per child under 17, with eligibility subject to income limits.
Earned Income Tax Credit (EITC): This credit is accessible to the custodial parent only. Non-custodial parents are not eligible to claim EITC for children not living with them.
Education Credits: Credits, such as the American Opportunity Credit, are claimable only by the parent who has filed the child as a dependent, providing tax liability reductions.
Student Loan Interest Deduction: While not a credit, this deduction is available to reduce taxable income based on qualifying student loan interest payments, claimed if the child is a dependent.

Assessing Financial Support - Accurate financial support assessment is essential for determining tax benefits:

Financial Support: Typically includes housing, food, clothing, education, and other necessities. The parent offering over half the support often affects custodial decisions and related benefits.
Custody vs. Support: The custodial parent under IRS rules is determined by physical residency, not by who provides more financial backing.

Making Tax Decisions During Divorce - Divorce involves specific tax considerations:

Dependency Release: Post-divorce, a child may qualify for dependency by the non-custodial parent if certain conditions, like a formal release declaration (IRS Form 8332), are met.
Filing Status: Divorced individuals should carefully evaluate their tax-filing status for potential benefits such as the head of household, offering broader tax brackets and deductions.

Criteria for head of household status include being unmarried, paying more than half the home upkeep costs, and having a qualifying person reside with you for more than half the year.

Collaborating with the ex-spouse and seeking expert tax advice can optimize tax benefits and avert penalties or audits.

Divorces are complex; however, understanding these tax nuances ensures compliance and aids in leveraging financial advantages to benefit the involved children’s welfare. Proper tax planning fosters improved financial stability post-divorce.

Consult with our office for guidance on tax implications in these scenarios to arrive at favourable financial solutions.

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