Divorce has a significant impact on a couple’s tax liability. This is especially true if the couple has minor children.
While they are married, most couples choose to file jointly. By doing so, they are both able to benefit equally from child-related exemptions and deductions.
After the divorce, only one parent can claim a child as a dependent. Usually, the parties will assign dependent status as part divorce agreement. If they don’t, then the general rule of thumb is that exemptions are properly assigned to the custodial parent – that is, the parent the children live with most of the time.
In the rare case that the child spends equal time living with each parent, the exemption should go to the parent who provides the majority of the child’s financial support.
Custodial parents receive a number of tax benefits. They include:
- Head of household status: Instead of filing as “single,” the custodial parent can file as the head of household. By doing so, he or she will benefit from a higher personal exemption and a lower taxable income. In addition, the custodial parent will also benefit from having more income fall into lower tax brackets.
- Dependency exemptions and credits: Exemptions reduce the amount of income that is subject to income tax. Generally, the custodial parent can claim an exemption for each child who is either under age 19 or under age 24 and a full-time student. In addition, the custodial parent can claim a tax credit for each child under 17. Depending on the parent’s income, each credit could be worth up to $1,000.
- Child care tax credits: Custodial parents can claim a tax credit for a percentage of the money they spent on daycare, babysitting, nannies or any other form of child care. The credit varies based on income, but can be worth up to $3,000 for one child or $6,000 for two or more children.
- The Earned Income Tax Credit: The EITC is designed to provide an income boost for low- to moderate-income parents. The size of the credit varies based on the amount of earned income and the number of dependent children. Since child support is not taxed as income, even parents who receive a high level of support may be able to benefit from the credit.
These are just a few of the many tax consequences of divorce. It is always a good idea to seek professional help when filing a post-divorce income tax return in order to make sure that everything is handled correctly.