Confronting your federal and state tax filings as a recently divorced parent brings forth a myriad of considerations, especially when it comes to filing taxes with dependent children in the equation.
The complexities of claiming dependents, Child Tax Credits, and understanding the nuances of post-divorce financial implications can be confusing and the advice you may get might be contradictory.
In this blog post, we explore key considerations for divorced parents, shedding light on the complexities of tax credits and obligations in the aftermath of a divorce.
Child Tax Credit
This federal income tax credit, available for each qualifying child under age 17, may be significant to a single-income household, especially if your income is under $200,000 per year. The amount of the child tax credit you can claim 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 child tax credit is reduced for incomes above $200,000 for single filers and $400,000 for married couples who file jointly. For parents whose income levels exceed $200,000, an additional dollar reduction per each $1,000 is applied to the credit and thus less significant. Note that for divorced parents, the child tax credit can only be claimed by one parent.
Disagreements can arise between co-parents over which parent is allowed or entitled to utilize the child tax credit and claim Head of Household. These are issues that should be considered during your divorce rather than after so that each tax year of our children’s minority is reviewed and assigned to one of the parents.
Determining which parent can claim the Child Tax Credit should be outlined in the divorce Decree and/or Parenting Plan. More often than not, it favors the parent with over 50% of the custodial time. Arizona child support statutes allow for alternating the child tax credit based upon factors such as parenting time with the child, the percentage paid by one to the other in child support, and their individual share of the combined income (pro rata share). Co-parents frequently opt to claim dependents in different tax years. This flexible arrangement, whether by mutual agreement or court order, ensures both parents can leverage tax advantages at different times. And if child support is modified after there are changed circumstances after divorce, then the child tax credit can also be changed at that time.
Head of Household Status
Head of household is a tax filing status that may be used by unmarried taxpayers who support and house a qualifying person. For unmarried parents with qualifying children, securing the head of household status becomes an opportunity for a lower tax rate and a more substantial standard deduction. To qualify, IRS rules require that the main provider of care (that is more than 50%) and the other parent then is disallowed from claiming Head of Household.
For parents who have gone through a divorce, it’s important to understand your tax responsibilities and the potential benefits related to your income and children. A well-crafted divorce decree and a detailed parenting plan that covers tax details go a long way in making sure both parents are compliant with IRS rules. Your accountant or tax preparer can offer valuable insights to your attorney should any disagreement arise.
McMurdie Law & 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 provided here is for general understanding only of the tax implications that arise after divorce. For a personalized consultation, reach out to us at (480) 777-5500.