I marvel at the number of people that do not consider the tax implications of divorce. One important consideration is the dependency deduction for children. The current tax exemption amount for each dependent child is $3,200. For someone in the 31% tax bracket, this will save him or her over $1000 in taxes. In addition to the dependency exemption, there is also the tax credit which is currently $1,000 for each child under 17. According to the tax code, the parent that is designated as custodial parent (the parent with physical custody) in the divorce decree, is entitled to the dependency exemption. However, the parties can by specific written agreement, provide that the non-custodial parent will be entitled to claim the dependency exemption. Most judges and practitioners believe this is appropriate. If there is only one child, or an odd number of children, the parties can agree to alternate claiming the child as a dependant from year to year. This agreement must be clearly and specifically set forth in the final divorce decree or property settlement.. However, if you don’t ask for it, no one is going to offer to give it to you. Important Tip: Make sure that your attorney includes a clause in the judgment that requires the custodial parent to sign IRS Form 58332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) If there are two children, the parties can agree that each will claim one of the children as a dependent.
There is also a significant tax advantage if you are able to claim head of household tax filing status. In order to claim head of household status, your home must be the principal residence of the minor child for more than half of the year. Make sure that you keep a calendar of the days and nights. Your child spends at your house and at your ex-spouse’s. Then you’ll have documentation, which you can provide to the courts and to the Internal Revenue Service (in relation to the dependency exemption and head of household filing status.). This practice will also help resolve any disputes, you have with your ex-spouse regarding who had children on a particular day.
If you and your spouse have joint custody of the minor children with approximate equal parenting time, you both may be eligible to claim head of household status if the agreement is clear. The language should indicate something to the effect that you and your spouse will arrange your schedules so that each of you will have one of the children for more than half of the year – it could be just one more day (183 days).