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.

2 Comments

  1. If you are not getting the tax exemption every other year you are getting a raw deal. If you are paying child support, you should get to claim the kids AT LEAST every other year.

    Anonymous at 9:19 pm on April 6, 2011
  2. “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.”

    This is really bad information given here. Somebody can get into serious tax trouble following this advice.

    Only the person claiming the exemption for the child may claim any credits. Irregardless of whether the other parent or guardian might qualify for earned income credit if they had taken the exemption. Whoever takes the exemption is the only one that can claim the credits. My best advice is to talk to your tax professional and determine which parent or guardian would best qualify for the maximum tax benefit before you file.

    I would rather give the money to an ex than let the government have it. At least the child would benefit from it at some point.

    I prepare taxes in the state of Virginia and Maryland and have done so for over ten years. Both individual and small business returns.

    Mike at 9:16 am on April 11, 2011

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