As a divorce attorney in San Marcos and Austin, I often recommend that my clients consult with a tax professional during the divorce proceedings to get an personal assessment of how taxes will impact the division of property and debt after divorce.
One of the lesser-known complications of divorce involves taxes, specifically child-related tax breaks awarded to one of the parents. At times, agreeing on who gets these tax benefits boils down to who can claim the child as a dependent.
Who Has Custody Over the Child?
When it comes to tax issues, children are usually able to be claimed by parent with custody for most of the year; that parent is typically called the “custodial parent,” with the other parent called the non-custodial parent.
What usually happens is the custodial parent can claim the dependent exemption deduction. However, a noncustodial parent rule enables the custodial parent to waive their right to claim the child as a dependent—a tax provision that noncustodial parents should be aware of.
Requirements for Tax Break Eligibility
Under this exemption rule, the designated child is considered a qualifying child of the noncustodial parent, provided the following requirements are fulfilled:
Support: One or both parents must shoulder more than half of child support for the year;
Divorce or separation: The parents should be divorced or separated at the end of the year (as provided by a written agreement) or have not lived together over the last six months;
Custody: The designated child must be under the custody or one or both parents for more than six months;
Written declaration: Custodial parents must make clear their intentions of waiving their right to claim the child as a dependent through a signed written declaration. This effectively releases their right to claim the child as a dependent for the year to the noncustodial parent;
Tax Breaks for Parents:
Upon meeting these requirements, the noncustodial parent can then claim tax benefits that include, but are not limited to, the following:
Dependency exemption deduction – As of 2016, the deduction is set at $4050.
Child tax credit – Noncustodial parents can avail of up to $1000 in tax credits for each designated child. Note that this tax credit is dependent on a phase-out rule for parents with higher incomes.
Education tax credits – Comes in two types of credits:
American Opportunity credit – Worth up to $2,500 and can be used during the designated child’s first four years in college
Lifetime Learning credit – Worth up to $2,000, covering all tuition costs for children taking up higher education
Interest deductions for student loans – Deductions can be as much as $2,500 for the student loan interest cost paid by noncustodial parents.
Deduction for tuition costs – Worth as much as $4,000 for enrollment fees and higher education tuition. The tax credit is subject to income bracket rules; high-income levels reduce the maximum deductible amount to $2,000, until being disallowed completely at even higher income levels.
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