April 6th, 2011
Divorce & Taxes: Who Gets the Dependency Exemption?
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This guest post was written by Stacy Bumpus from Go Banking Rates, a website that brings you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide. Follow them on Twitter at @GoBankingRates.
Most people assume that when parents are divorced or separated, the parent who has primary custody of any children takes the dependency exemption when filing taxes. Indeed, since 1985, the IRS has allowed the parent with custody to take the exemption by default.
However, as is true in so many areas of personal finance, the default choice may not be the best one for all parties involved.
How the Dependency Exemption Affects Your Tax Return
Every dependency exemption reduces taxable income by $3,650 (for 2010). For a parent in the 25% tax bracket, that’s a tax savings of $912.50 per child. For a parent is in a lower tax bracket, however, that same dependency exemption is only worth $547.50, or it could be worthless to a parent who doesn’t owe any income tax at all.
By using the default choice, regardless of tax consequences, you and your ex could be losing the chance to get the maximum tax benefit possible that benefits both of you.
Strategies for Making the Most of the Dependency Exemption
A better plan is to decide, either by an agreement between the two of you or by a court order, who can take the dependency exemption. Generally, it’s advantageous to have the parent who makes more money take the exemption and then share the tax savings, such as by adjusting child support payments/
If you and your ex make a similar amount of money, you may want to take turns taking the exemption instead. Or, if you have more than one child, you could each take one or more of the dependency exemptions.
If a parent other than the custodial parent takes the deduction, the custodial parent fills out Form 8332 and gives it to the other parent (if a divorce or separation agreement from before 2009 stipulates who gets the deduction, it can be used instead).
See your accountant or IRS Publication 501 (2010): Exemptions, Standard Deduction, and Filing Information for detailed instructions.
When circumstances change, so can your tax strategy.
Suppose a few years from now the custodial parent has a very successful career and needs those exemptions more than his or her ex does. The parents can change who gets the exemption. The custodial parent fills out Section II of Form 8332 and revokes permission for the ex to take it.
Be sure to remember that dependency exemptions have nothing to do with the child care credit or the earned income credit. If you are the custodial parent, you can still take those credits if you meet the qualifications, even if your ex takes the dependency exemptions for the kids.