Tax Filing For Divorced or Separated Parents: What You Need To Know

Tax season is stressful enough. It can be even more so if you are recently separated or divorced and share custody of your children. Many parents are unsure how to handle tax filings in these situations, which can add unnecessary tension to an already complicated process. If you are a parent who is divorced or separated and shares custody, or confused on navigating this new challenge, then keep reading. We'll break down some of the basics, discuss some important considerations and hopefully clear up some of the confusion.

WHO CLAIMS THE CHILD TAX CREDIT?

Probably the most common question is: Who gets to claim the children or child tax credit? The IRS allows only one parent to claim a child as a dependent each year. In most cases, this is the parent with whom the child spends the most nights. However, parents can agree to alternate years or split exemptions if they have multiple children—provided this is outlined in a clear, written agreement. If there’s no agreement, the court will decide how the exemption is allocated. That’s why having a well-structured parenting plan that includes tax considerations is so important. For anyone who is still in the process of creating a parenting plan or having one put in place, I highly recommend you include provisions for which parent will claim the children and when. With emotions running high in divorce or custody settlements, this matter often gets overlooked by the parents. However, it may have long-term implications on your finances so it is important to check the paperwork regarding tax claiming rights. It can also eliminate disagreements or disputes later down the line, especially in high-conflict co-parenting dynamics. Having this planned out in advance also ensures both parents benefit fairly and avoids any last-minute surprises during tax season.

BENEFITS OF CLAIMING DEPENDENTS ON TAXES

Claiming head of household status can provide significant tax benefits, but it’s not always straightforward for newly divorced parents. Generally, the IRS requires that the qualifying parent have most of the parenting time. Raising a child is always expensive. It doesn’t end with primary needs like feeding, clothing, healthcare, and schooling. There are extra costs for daycare, leisure activities, and so on. Fortunately, the IRS provides parents with several tax exemptions and credits to assist with the expense of raising a child. This is particularly important for parents who are divorced and are responsible for raising a child.

For Colorado parents, you may be able to claim for the following common tax benefits (subject to the ever-so changing federal tax laws):

• Dependent Care Credit – for parents who must pay daycare or babysitting costs for children under 13 while they are working or looking for work

• Head of Household – for parents who pay for more than half of the household expenses and have at least one dependent

• Earned Income Tax Credit (EITC) – for parents with low-paying jobs who need to claim for earned income tax credit

• Child Tax Credit –for parents with a child of 16 years or younger and who need to claim for expenses beyond those permitted by the Dependent Care Credit benefit

• Dependent Exemption – for parents who:

  • Provide more than half of their child’s expenses

  • Have provided a place to live for their child for more than half the year, and

  • Have a child under 19 at the end of the year (or under 24 and a full-time student)

Note that if your child is mentally disabled or in further education, your rights to claim for them as a dependent may be extended.

COMMON TYPES OF ARRANGEMENTS

In some cases, parents can take turns claiming the child tax credit. This is why it’s essential to have a clear agreement in place. The IRS only allows one parent to claim a child as a dependent each year. In joint custody situations, parents can alternate years if they both agree and properly document the arrangement.

Common arrangements may include: alternating every other year for all of the children. For example, parent A claims the child in even-numbered years, and parent B claims the child in odd-numbered years. Or in cases where there are multiple children, splitting the children and each parent gets to claim a dependent. I have also known parents who have negotiated compensating the other parent in a way that benefits both parties in certain circumstances. Though I still highly recommend having a clearly defined and legally agreed upon plan.

WHAT HAPPENS IF BOTH PARENTS CLAIM THE CHILD?

If both parents file taxes claiming the child, the IRS will reject one of the returns or initiate an audit.

The IRS has a set of tiebreaker rules that include considering which parent the child lived with longest, the parents’ adjusted gross incomes, and if neither parent can claim the child under these rules, whether a non-parent who qualifies can claim the child.

If the parents split custody exactly 50/50, the parent with the higher adjusted gross income (AGI) wins.

If the parents cannot agree, the IRS will review the legal documentation to make a decision.

To avoid this issue, you need a clear agreement in place before tax season, as it can cause serious delays in receiving tax benefits and headaches to sort out later.

UNSURE IF YOU CAN CLAIM A CHILD CHILD ON TAXES?

The tax laws are constantly changing and can undoubtedly be confusing. Especially as a newly divorced or single parent. The dependent exemptions and credits for a custodial parent can be significant, so they are worth paying close attention to. Note that the court and the IRS view custody differently and when filing tax returns, you need to abide by the IRS definitions of custody. Tax rules are complex and many parents struggle to understand what they are entitled to, which can mean that they miss out on deduction and benefits or unwittingly break the tax rules.

IMPORTANT CONSIDERATIONS

• Can a parent who pays child support automatically claim the child? The short answer is, no. Paying child support does not give the automatic right to claim the child. Only the custodial parent or parent with a written agreement from the courts can do so.

• Tax exemptions with your employer. This is a BIG one and something I wish someone had told me ahead of time! If you are in an agreement where you are alternating years for claiming your child, it is highly beneficial to adjust your withholdings for your paychecks accordingly. If it is your year to claim your child (or children) you normally account for those dependents to reduce withholdings from your paychecks via the Child Tax Credit or Credit for Other Dependents. If it is not your year to claim them, than this should be adjusted with your employer because without claiming these Child Tax Credits it could significantly impact or increase your tax obligation and how much you end up owing when you are not claiming your dependents. This could be financially devastating for some and is honestly something nobody really warns you about or is easily overlooked. If this is confusing to you, consulting a tax advisor may be helpful and they can help you navigate your unique circumstances to best protect you come tax time.

Divorce and co-parenting or single parenting is challenging enough. Knowing how to approach things like taxes and other complex issues is key. There are a ton of resources and tools out there so if it seems overwhelming~ know you aren't alone and there is support out there! If you have advice, experiences or questions drop a comment below. I'd love to hear from other fellow parents!

Melissa