Child Tax Credits and Separation or Divorce

No one likes paying taxes, and like practically everyone else, you probably look for ways to lower the amount you owe the IRS each year. This is where tax credits come in. They lower the amount of taxes you have to pay to the IRS, dollar for dollar.

There are all sorts of tax credits for all sorts of taxpayers, but some of the most valuable credits are given to parents to help them cover the costs of raising and caring for their children. But what happens when parents get divorced or separated? It's often difficult to figure out who can take the credits because of the many special rules that apply for credits such as the Child and Dependent Care Credit, Child Tax Credit and Earned Income Credit.

However, because these credits can have a huge impact on your tax bill, it's good for divorced or separated parents to know how and when they can take them.

The Child and Dependent Care Credit

In general, this credit helps you cover the costs and expenses of child care you have to pay so that you're able to work or look for work. Care might be daycare for your child, for example.

The credit amount is up to 35 percent of your care expenses, up to $3,000 for one child and up to $6,000 if you have more than one child.

Children Covered by the Credit

For most taxpayer-parents, the credit applies to a child who is:

  • A qualifying individual, meaning the child lived with you for over half the year, and
  • Your dependent, meaning the child is a qualifying child for tax purposes, and
  • Under 13 years old or disabled

Special Rules for Divorced or Separated Taxpayers

Special rules apply for divorced or separated taxpayers claiming the credit. Generally, only the custodial parent can claim the credit. Also, even if the custodial parent releases or gives the noncustodial parent the right to claim the dependency exemption for the child, the noncustodial parent still can't claim the credit.

Also, you may be able to claim the credit even if your child isn't your dependent so long as all other requirements are met and:

  • You're the custodial parent
  • You had custody of the child for more than half the year
  • You or your ex-spouse provided over half the child's support

There are other requirements that need to be met before any taxpayer-parent may take this credit. Be sure to look carefully at the IRS materials explaining the credit, or talk to your tax attorney.

Child Tax Credit

The Child Tax Credit gives taxpayer-parents with incomes below certain amounts a $1,000 credit for each qualifying child who is under age 17. Again, there are specific requirements for a qualifying child for this credit.

Special Rules for Divorced or Separated Taxpayers

The custodial parent usually takes this credit. However, the noncustodial parent may take it if the custodial parent releases the dependency exemption to the noncustodial parent.

Also, as a single taxpayer, the credit is lowered, and possibly not available at all, if your adjusted gross income is over $75,000.

Earned Income Credit (EIC)

Parent-taxpayers may be able to claim a credit based on their earned incomes. Basically, the EIC gives a tax break for workers with low wages. Whether any taxpayer can take the credit depends directly on the taxpayer's earned income and adjusted gross income. For parents, the amount of the credit depends directly on the number of children - the more children, the higher the credit.

Like the other credits, your child must be a qualifying child in order for you to be eligible for the increased credit amounts for taxpayer-parents.

Special Rules for Divorced or Separated Taxpayers

Important points to know about the EIC if you're separated or divorced are:

  • Only the custodial parent may take the EIC. A noncustodial parent can't take the credit even if the custodial parent releases the dependency exemption
  • For EIC purposes, alimony and child support paid to you is not "earned income" (even though alimony paid to you is taxable income)
  • You may be able to take the EIC based on your own income, even if your ex-spouse claims the EIC as the custodial parent
  • Even if you're the custodial parent with a qualifying child and satisfy the other EIC requirements, you can't claim the EIC if you are someone else's qualifying child, such as if you and your child live with your parents after the divorce

The EIC can be complicated for any taxpayer. In fact, taxpayers claiming the credit when they're not entitled to is one of the most common errors found by the IRS. Before taking or skipping the credit, it's important to look at the IRS' EIC materials carefully, or talk to a tax attorney or another tax professional.

Be Sure Before Filing!

Divorce or separation can have a big impact on your tax credits. You'll pay more taxes if you don't take credits you're entitled to. On the other hand, you could face big fines and penalties by taking credits you're not supposed to take. The divorce was stressful enough. Don't let it take another, bigger chunk out of your wallet. Make sure you understand the tax laws or get help from a tax law attorney before you file.

Questions for Your Attorney

  • Can I claim my siblings as dependents if I support them?
  • How many child tax credits am I allowed to claim in a single year?
  • Is it possible to qualify for the Earned Income Credit if only one spouse earns more than the maximum amount to qualify?

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