As the parent of one or more minor children, you have “a lot on your plate”. If you’re recently divorced or going through a divorce, taxes can present a tricky financial situation. Divorced parents need to be aware of the tax implications related to their children and their divorce agreement.
Here are some important things to keep in mind:
The 2017 Trump Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 changed the rules for claiming the Child Tax Credit, making it easier for some families to claim the credit by increasing the amount of the credit, the income limits, and the age of the child. The act also eliminated the old Dependent Tax Exemption.
Child Tax Credit
The child tax credit is a federal income tax credit available for each qualifying child under age17. You may be able to claim the full amount of your child’s expenses, even if you do not owe any taxes, by reducing your tax bill or increasing your refund.
The amount of this credit depends on your income and filing status, and may be worth as much as $2,000 per qualifying child (or up to $1,400 if only one parent claims the child). The maximum amount phases out as incomes rise above certain thresholds; for single filers is $200,000 and for married couples is $400,000 who file jointly. For those folks over those amounts, an additional dollar reduction per each $1K is applied to the credit.
The Child Tax Credit is a tax credit of up to $2,000 per eligible child. Only one parent can claim the credit. In most cases, the custodial parent claims the child on their tax return. However, the divorce agreement can specify which parent can claim the credit and is usually given to the parent who may have the child more than 50% of the time as a general rule of thumb.
The issue of claiming a child as a dependent on tax returns can be disputed between co-parents because claiming a child as a dependent can provide significant tax benefits, such as tax credits and deductions that can lower a parent’s overall tax liability.
When parents’ divorce, they may negotiate and agree on a parenting plan, which typically outlines how parenting responsibilities and time with the child will be divided. As part of this plan, the parents may also agree to alternate or disburse in future tax years to claim the child as a dependent on their tax returns. Arizona has its own recommendation within the child support statutes that allows for alternating the child tax credit based upon factors such as parenting time with the child, percentage paid by one to the other in child support and their individual share of the combined grow income (pro rata share). This arrangement can be mutually beneficial because it allows each parent to benefit from the tax advantages on specific different years by agreement of the parties or by order of the court.
Head of Household: If you are unmarried and have a qualifying child, you may be eligible to file as the head of household, which can result in a lower tax rate and a larger standard deduction.
To qualify as head of household, you must meet the following requirements:
- You are the main provider of care for the child and provide more than half of his or her financial support.
- The other parent does not claim him or her as a dependent on their taxes.
Working Together to Maximize Tax Credits and Minimize Tax Liabilities
Who is responsible for paying income taxes during the tax year of their divorce? In some divorce agreements, they may agree to share their tax liability or share the refund by pro rata share or equally because but for the other party filing married and joint, they would not be receiving such favorably treatment. This is only during the year that the divorce goes into the next tax year. If parties are divorced during a given tax year they most often file separately because they are divorced by law during that tax year.
It’s important for divorced, or divorcing, parents to understand their tax obligations and the tax benefits related to their income, and children. A clear and detailed divorce agreement and a parenting plan that outlines tax stipulations can help ensure that both parents are following IRS rules. The parties should meet with their accountant or tax preparer who can make recommendations to the attorney preparing divorce documents as the attorney follows the law regarding divorce and the tax preparer is the specialist regarding filing taxes.
McMurdie Law and Mediation will work in concert and will incorporate the Parties’ tax expert and tax preparer’s recommendations in all legal documents that require it and will not and does not provide any tax advice. The information in this blog is for a general understanding only of the credits for children that must be addressed during a divorce or legal separation in Arizona. For a free phone consultation contact us at (480) 777-5500.