by Alex Kwoka, Attorney at Law, Law Office of Alexandra M. Kwoka
If you are considering separating or divorcing, and/or moving from the marital home with a child or children, thinking about how you will file your tax return is important.
First: When will you separate into two households?
If you move out after June 30 in the tax filing year, you will not be able to claim either “Head of Household” or “Single” tax status, which means your tax rate may be greater than when you were married if you filed jointly.
HH status is a benefit to a parent, because filing as HH generally results in taxation at rates lower than “Married filing separately” or Single.
To file as Head of Household, at least one child must live with the taxpayer. The taxpayer must “maintain the household” by paying for housing, utilities and food. The household must also be “the principal place of abode” of the child, which means the child must live with the parent for more than half the year according to IRS Regulations.
Because of this, be cautious in describing your custody arrangement if you are thinking of sharing custody of a child or children. If you are planning on being the Head of Household, as a parent you may need to prove that you maintained a household for a child AND had approximately 51 percent of custody time. If you and your spouse share time equally or 50/50 you may not be able to qualify for HH status.
Even if there is no Court order determining custody, if you and your spouse are NOT living together for the last six months of the year, and you maintain a household for a child or children, you may qualify for HH status AND a child care credit if you file a separate return and meet the other requirements.
California law permits a taxpayer to claim a “joint custody Head of Household credit” if parties have lived separately for an entire year, AND a child lives with a parent no less than 146 days and no more than 219 under a written agreement or a Judgment or order. The law may be different in another state.
Second: Who will claim your child or children as dependents?
IRS Regulations permit parents who have elected to separate or divorce (and taken steps to separate/divorce by moving to separate households) to not only claim one of several tax status when tax returns are filed, but also to decide who will claim a child or children as a dependent.
Claiming a child as a dependent means you claim a “dependency deduction,” also called a “dependency exemption.”
The deduction/exemption means that the amount of the dependency exemption is deducted from your income. It reduces gross income in the calculation to arrive at taxable income.
In tax year 2013, the eligible dependency exemption is $3,900 unless a taxpayer is subject to Alternative Minimum Tax; or the deduction is reduced because his/her adjusted gross income exceeds $300,000 on a joint return, $275,000 on a HH return, $250,000 on a single return, or $150,000 on a married filing single return.
This means if you are a taxpayer in the 28% bracket in 2013, a $3,900 exemption is worth $1,092.
To claim a child as a dependent:
- The child must be under 19 as of 12/31 of the tax year OR be a full-time student under the age of 24.
- The child must be a dependent – i.e., live with the parent for more than one-half of the tax year.
- The parent must provide support for the child.
If a child lives with both parents, or one parent is the parent with physical custody under a decree, order or Judgment but both parents claim the child as a “dependent,” the IRS determines who is the “custodial parent” by looking for proof. The IRS will determine which parent was the one with whom the child resides for the greater number of nights during the calendar year.
A parent with custody can “release” a dependency exemption for one or more children to the other parent by signing and filing IRS Form 8332. It permits a custodial parent to release the exemption for one year, for several and/or future years, and to revoke the release. The non-custodial parent can then claim the child as a dependent by attaching the signed form to his or her tax return. IRS Form 8332 explains the rules for children of divorced or separated parents, and is available online.
The Child Care Credit
If a parent can claim a child as his/her dependent and if the parent has child care costs for this child (who must be under age 13) IRS Regulations also permit the parent to claim a child care credit if he/she is the custodial parent.
But a non-custodial parent to whom a dependency exemption has been released can NOT claim on her/his federal tax return a child care credit. The custodial parent alone may claim the child care credit.
The amount of the child care credit depends on the claiming taxpayer’s income. And, expenses which can be claimed are capped: $3,000 for one child; $6,000 for two or more children.
Because these rules and conforming with them to the satisfaction of the IRS can be complex and involve a significant amount of tax savings, it is wise to consult your tax professional if you have any questions or concerns.