Raising children is an expensive process, and when parents live in separate households, the expenses increase. The State of California and the federal government both provide tax credits that can offset a few of the costs. When parents are married and file tax returns jointly, they share the benefit of these credits.

But what happens when they live apart? Can they each claim the child on their taxes and take part of the benefits? How should taxes be handled for parents who are divorced or who never married? If you pay child support, do you automatically get to the take the tax benefits? It is important to understand and address tax issues ahead of time, particularly if you are establishing the terms of a divorce settlement.

While the Dependent Exemption is Gone, Status as a Dependent Matters

When federal tax laws changed a few years ago, the federal government eliminated the tax exemption for children and other dependents. However, these were replaced in many cases by tax credits. Generally, a tax credit can only be taken for an individual who is listed as a dependent on your tax return. So it is important to declare the appropriate dependents on your return. This includes not only your children but can also include siblings, grandchildren, and other descendants who lived with you for more than half the year and who provide no more than half of their own financial support.

A Child Can Only Be Claimed on One Tax Return

Child tax credits cannot be shared between parents if they file separate tax returns, even if they are married filing separately. A child can be listed as a dependent only once.

Parents can still share the financial benefits obtained from child tax credits, but they need to establish separate arrangements for doing so. This can be set up in many different ways as part of the divorce settlement. The parent who claims the tax credits may be required to make an outright payment to the other parent that represents a portion of the tax credit. Or the parents might take turns claiming the child as a dependent in alternate years. If parents have more than one child in common, one parent might claim the first child while the other parent claims the second child. An experienced family law attorney can review a number of options with you.

The Federal Government Assumes the Parent with Custody is Claiming the Tax Credits

Even when the noncustodial parent is the one paying the majority of a child’s living expenses, the U.S. government assumes that the parent the child lives with most of the time—the custodial parent—is the one with the right to claim the child as a dependent and obtain the tax credits. It is possible for the noncustodial parent to claim the child and the accompanying tax credits, but only if the custodial parent signs Form 8332 Release/Revocation of Release of Claim to Exemption for Child By Custodial Parent. The parent claiming the child as a dependent must file this signed form with their tax return. Moreover, they need to be ready to file their taxes early. If the custodial parent forgets they signed the form, they can still claim the child, and if they file their return first, the other parent will be out of luck. The system that processes tax return information will not allow a child to be claimed as a dependent more than once.

Work with an Attorney to Ensure that Tax Benefits are Fairly Accounted for Between Parents

Since a parent may be able to claim tax credits on both their federal and California tax return, the credits could amount to several thousand dollars each year, depending on the parents’ incomes. It makes sense to develop a fair plan to allocate the benefits between parents, including provisions to adjust the arrangements in the future if tax laws change.

An attorney can help assess the value of the tax benefits and create a plan to ensure that the value is shared in some way that can be enforced if necessary.

Talk to Holstrom, Block & Parke, APLC if You Have Questions About Allocation Responsibilities Between Parents

The Certified Family Law Specialists and associates at Holstrom, Block & Parke, APLC, know that parents have many issues to consider in divorce and that taxes often get overlooked or pushed to the bottom of the priority list. We work to protect our clients by ensuring that taxes receive appropriate consideration so that you receive your fair share of resources during and after a divorce.

To discuss the ways we can protect your interests, schedule a confidential consultation with our team today.