Tax benefits related to children

Survivors, particularly those with earnings, can receive a significant economic benefit if they are able to claim their children for some or all of these tax benefits.  Unfortunately, many survivors lose out on these benefits. 

The reasons are complex and may involve a range of factors including being unrepresented in family law court proceedings, being represented by counsel with insufficient knowledge of child-related tax benefits, or because abuse has made it difficult or impossible for survivors to take advantage of these benefits.  

Taxpayers must claim these benefits on their tax return to access them. The rules for claiming tax benefits related to children are found in the following IRS Publications:

• Publication 501, Exemptions, Standard Deduction, and Filing Information;
• Publication 503, Child and Dependent Care Expenses;
• Publication 504, Divorced or Separated Individuals;
• Publication 596. Earned Income Credit
• Publication 929, Tax Rules for Children and Dependents; and
• Publication 972, Child Tax Credit.

Who gets to claim the children?

Generally, only the "custodial parent" gets to claim a qualifying child for tax purposes. The custodial parent is the parent with whom the child lived for the greater number of nights in the tax year. The noncustodial parent is the other parent. If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income.  

However, there are exceptions for the children of divorced or separated parents.

A child will be treated as the qualifying child or qualifying relative of his or her noncustodial parent if the following four (4) conditions are met: 

1. Separation. The parents are divorced, legally separated, separated under a written separation agreement, or lived apart at all times during the last 6 months of the year (whether or not they are or were married). 
2. Support. The child received over half of his or her support for the year from the parents. Support of a child received from a parent's spouse is treated as provided by the parent. 
3. Custody. The child is in custody of one or both of the parents for more than half of the year. 
4. Release Agreement. The custodial parent signs Form 8332 or a substantially similar statement that he or she won't claim the child as a dependent for the year, and the noncustodial parent includes a copy of the form or statement with his or her return. 

These exceptions do not apply to ALL tax benefits. Certain credits can only be claimed by the custodial parent, such as the Earned Income Credit. See the table in the next section for more details, as well as Publication 501 and the Instructions to Form 1040, line 6c.

Examples of Tax Benefits

The primary child-related benefits are shown in this table:

Affordable Care Act ("Obamacare") considerations

The parent who claims the child as a dependent is responsible for ensuring that the child has minimum essential health coverage under the Affordable Care Act (ACA).  If the child does not have minimum essential health coverage and is not exempt, the parent will incur a penalty called the Individual Shared Responsibility Penalty (ISRP). 

The ISRP appears as an additional tax on the parent’s tax return.  The parent who claims the child has the benefit of including the child in household size calculations for determining how much Premium Tax Credit the household qualifies for; the PTC helps pay for coverage under marketplace health plans.

Reponding to spouses demands for tax benefits

Many survivors, like Leah, will face demands from the spouse they are divorcing to be granted the child-related tax benefits.  Attorneys who represent survivors facing these choices should provide calculations to the survivors showing what these child-related benefits are worth. 

When parents are separated, both may want and attempt to claim the same child as a dependent or as a qualifying child for valuable tax benefits, such as the EITC.  This often occurs even after a divorce court has awarded child-related tax benefits to one of the parents. 

As noted above, IRS is not bound by a state divorce court’s decision concerning which parent may claim a child because IRS has its own rules that determine which parent is eligible to claim a child. 

Time is of the essence

After one parent has filed a return claiming a child, the second parent will be unable to file electronically a tax return claiming the same child.  The second parent can still file a paper tax return by mail claiming that child.  According to IRS, it takes six to eight weeks to process a paper tax return, which is why many taxpayers choose to “e-file” their tax returns.    A taxpayer who has e-filed a return should receive a refund within 21 days and will often receive it much sooner. 

Depending upon how close in time IRS receives two returns claiming the same child or children, IRS may review both before processing, may process one instead of the other, or may process both and then audit one or both. 

Tie-Breaker rules

IRS has “tie-breaker” rules, which apply to determine which parent may claim a child for the dependent exemption and the EITC when both parents meet the basic criteria for claiming the same child.  The credit is given to the parent with whom the child has resided the longest during the year.  If a child resided with both parents an equal amount of time, then the Earned Income Tax Credit goes to the parent with the highest adjusted gross income.