Who Claims the Children’s Tax Benefits

Learn how the custodial parent claims children’s tax credits.
Learn why you should really think about whether or not you release dependency.
Find out how joint custody affects children's tax benefits.
Discover the tiebreaker rules.
Find information about the Head of Household filing status.
Learn about the tuition credit.
Find information regarding the child care credit.
Learn about the child tax credit.
Find out if you qualify for the Earned Income Tax Credit.

Are you a divorced or separated parent? A commonly encountered but often misunderstood issue is who claims the child or children for tax purposes. This is sometimes a hotly disputed issue between parents. However, tax law includes some very specific but complicated rules about who profits from child-related tax benefits. Children’s tax benefits include the children’s dependency, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and, in some cases, even filing status.

This is actually one of the most complicated areas of tax law. Unfortunately, inexperienced tax preparers or taxpayers preparing their own returns can make serious mistakes. If parents do not communicate well, things can become even worse. If parents will cooperate with each other, they often can work out the best tax result overall. It may not be the best for them individually, but they can compensate for it in other ways.

Who Claims the Children’s Tax Benefits - You or Your Ex-Spouse?

How does physical custody (custodial parent) affect children’s tax benefits?

If a family court awards physical custody of a child to one parent, tax law is very specific in awarding that child’s dependency to the parent with physical custody. The amount of child support provided by the other parent makes no difference. However, the custodial parent may release that dependency to the non-custodial parent for tax purposes. They do this by completing the appropriate IRS form. The parent can grant the release on a yearly basis or for multiple years at one time. But once made, the decision holds for the specified period.

CAUTION – Do not take the decision to relinquish dependency lightly, as it impacts a number of tax benefits.

How does joint custody affect children’s tax benefits?

What if the family court awards joint physical custody? Then only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and both actually claim the child, the IRS tiebreaker rules will apply. The tiebreaker rules treat the child as a dependent of the parent with whom the child resided for a greater number of nights during the tax year. But what if the child resides with both parents for the same amount of time during the tax year? Then the parent with the higher adjusted gross income will claim the child as a dependent.

Parents in the process of divorcing should be aware that for tax purposes, the IRS’s rules as to who can claim a child’s dependency takes precedence over what a prospective divorce decree says or what a judge may have ruled. So, for example, if the family court awards full custody of a child to Parent A but says that Parent B can claim the child as a tax dependent during the separation period prior to a final divorce decree, the IRS’s position is that the child is a tax dependent of Parent A unless Parent A releases the dependency to Parent B, as explained above.

Child’s exemption allowance

While no (through 2025) monetary tax deduction (also referred to as an exemption allowance) exists for a dependent child, it still matters who claims the child as a dependent. Why? Because certain tax credits only apply to the taxpayer claiming the child as a dependent.

Head of Household filing status and children’s tax benefits

An unmarried parent can claim the more favorable head of household, rather than single, filing status. They must be the custodial parent and pay more than half of the costs of maintaining, as their home, a household that is the child’s principal place of abode for more than half the year. They may do this even when they release the child’s dependency to the non-custodial parent.

Tuition credit

If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whoever claims the child as a dependent. Credits are significant tax benefits because they reduce the tax amount dollar-for-dollar, while deductions reduce income to arrive at taxable income, which is then taxed according to the individual’s tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500. Forty percent of this is refundable. However, both education credits phase out for taxpayers with adjusted gross income (AGI) between $80,000 and $90,000 for unmarried taxpayers and $160,000 and $180,000 for married taxpayers.

Child care credit

A nonrefundable tax credit is available to the custodial parent for child care while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and a dependent of the parent (there are persons other than a qualifying child that can be qualifying persons for the dependent care credit, but that is a topic for a later discussion). However, a special rule for divorced or separated parents provides that if the custodial parent releases the child’s exemption to the non-custodial parent, the custodial parent can still qualify to claim the child care credit, and it cannot be claimed by the noncustodial parent.

Child tax credit

A $2,000 credit is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $200,000 for unmarried parents and $400,000 for married parents filing jointly.

Earned Income Tax Credit (EITC)

Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency of a child or of children to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. In fact, the noncustodial parent is prohibited from claiming the EITC based on the child or children whose dependency has been released by the custodial parent.

As you can see, some complex rules apply to the tax benefits provided by the children of divorced parents. It is highly recommended that you consult your Fiducial representative to prepare your return. If you are a custodial parent, you should also consult your Fiducial representative before deciding whether to release a child as a tax dependent.

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