Deciding who claims child as deduction

[chrysalis139]

What is the name of your state (only U.S. law)? IL

Could someone please help me understand the impact of claiming or not claiming my child as a tax deduction? My husband was the one who always filed our taxes and this is a gray area for me. My husband has requested that we alternate years claiming our child as a tax deduction. My attorney tells me this is normative. I'm not opposed to the idea. I'm open to whatever is fair but I'd like to understand the issue better. Someone tried explaining to me that since our child will be living with me, I should be the one taking the deduction each year and mentioned something having to do with a child credit that is dependant on where the child lives. I don't really understand that and this person wasn't able to explain it further. I could use a quick 101 course. Again, I want whatever is fair but I also want to understand what I am agreeing to.

 

[mistoffolees]

What is the name of your state (only U.S. law)? IL

Could someone please help me understand the impact of claiming or not claiming my child as a tax deduction? My husband was the one who always filed our taxes and this is a gray area for me. My husband has requested that we alternate years claiming our child as a tax deduction. My attorney tells me this is normative. I'm not opposed to the idea. I'm open to whatever is fair but I'd like to understand the issue better. Someone tried explaining to me that since our child will be living with me, I should be the one taking the deduction each year and mentioned something having to do with a child credit that is dependant on where the child lives. I don't really understand that and this person wasn't able to explain it further. I could use a quick 101 course. Again, I want whatever is fair but I also want to understand what I am agreeing to.

There are two issues.

The first is what the IRS allows. By IRS rules, the person who has the child the most time (typically the most overnights, but there are some exceptions such as if one parent watches the child all day even if the child sleeps at the other house more than half of the time-although I suspect this exception is rare). If both parents have the child the same number of nights, then the tie breaker is whoever has the higher adjusted gross income (AGI). You can look up the rules for exemptions either on your tax forms or on irs.gov.

Those rules are inviolate. A divorce court judge can not overrule the IRS.

However, the two of you can agree to a different deduction allowance. For example, it is not uncommon if one parent has a high income and the other a low one for the parent with more income to want the deduction in exchange for perhaps greater child support. Or perhaps one parent's income is high enough that the deduction isn't worth much because of income caps and it makes sense for the other person to have the deduction. Or perhaps, as in your case, the parents decide to alternate the deduction. That is a fairly common situation, although I couldn't guess if it's the 'standard'.

In any event, if the two of you decide on something different than what the IRS allows, the person who would ordinarily be entitled to the deduction under IRS rules has to sign an 8332 voluntarily giving the deduction to the other person. So, let's say that the child spends every other weekend with the father. The mother would be entitled to the deduction every year. If you choose your alternating years, then you would sign an 8332 giving the deduction to the father only in his years. In the years that you get the deduction, there's no need for an 8332 since you are entitled to it under IRS rules.

The court does have the authority to allocate the IRS deduction, but they can not do so by fiat. if the court wants to insist on alternating years or any other allocation that does not violate IRS rules, they have to state that the person entitled to the deduction must sign an 8332. There is no way for a court to assign a deduction other than via the IRS 8332 form and making the appropriate person sign it.

You are right that things get complicated with credits and so on. If you can't afford an accountant to help, I would suggest going to one of the online tax preparation services and playing 'what if' games to see the impact. You might be surprised at the outcome.

 

[LdiJ]

Misto gave a good explanation, but I will add one thing that he left out.

Tax attributes for a child can also be "split" between two parents who are divorced or separated, in a limited set of circumstances.

Example:

Mom is the custodial parent and is low income enough to qualify for earned income credit. She is also entitled to head of household status.

Dad's income is irrelevant except to say that dad has enough income to benefit from the tax exemption and child tax credit. Because the child does not primarily reside with dad, dad is NOT eligible for head of household status or earned income credit...no matter what.

Mom may claim the child for head of household and earned income credit purposes, and dad may claim the child for the exemption and child tax credit.

If mom and dad want to take advantage of something like this however, I would strongly recommend that they use tax professionals to handle their returns, because its really easy to mess up and do it wrong.

 

[chrysalis139]

Wow. Thank you both for such thorough explanations. I really appreciate you taking the time to share so much information with me. It is extremely helpful. Just one more question....

My income potential is a little uncertain right now. I am in sales and will soon be returning to full time work after 2 years as a stay at home mom. I will start out at my new job making about 20k less than my husband but I do have the potential to earn significantly more than him down the road. If I agree to alternate years taking the tax deduction, can this be changed down the road if it is a greater impact or hardship to me in the future? Oh, in case it helps to know, I would be the custodial parent and my husband would have our son every other weekend.

 

[LdiJ]

Wow. Thank you both for such thorough explanations. I really appreciate you taking the time to share so much information with me. It is extremely helpful. Just one more question....

My income potential is a little uncertain right now. I am in sales and will soon be returning to full time work after 2 years as a stay at home mom. I will start out at my new job making about 20k less than my husband but I do have the potential to earn significantly more than him down the road. If I agree to alternate years taking the tax deduction, can this be changed down the road if it is a greater impact or hardship to me in the future? Oh, in case it helps to know, I would be the custodial parent and my husband would have our son every other weekend.

Anything is subject to change. However, as your attorney pointed out, the norm these days is for parents to alternate the tax exemption for children.

It may end up being a moot point. The IRS has been making noises for quite some time regarding eliminating the option of a non-custodial parent claiming a child. The theory is that states should be taking that into consideration when calculating child support, rather than making the taxpayers foot the bill for "policing" the issue at the IRS level.