How Child Custody Affects Your Tax Return

Now that January 1 has come and gone and people are settling in to 2015, many are beginning the mad scramble to collect the financial documents needed to begin filing federal and state income tax returns. While everybody knows they need their W-2s, 1099-Ints, and receipts if they plan to itemize deductions, there is another document that can have a huge impact on the federal tax refund – the child custody agreement.

Child Custody's Impact on Child-Related Tax Credits

Under the law, the custodial parent has the right to claim the children as dependents on her income tax return. Under a shared custody agreement, the parents may agree to take the dependent exemption in alternate years. The custodial parent also has the option of waiving his right to claim the children in favor of the non-custodial parent.

But the dependent exemption is not the only tax benefit involving children. Three child-related tax credits are also available to parents; however, two of them can only be claimed by the custodial parent and, unlike the dependent exemption, the custodial parent cannot waive the right to the credits in favor of the non-custodial parent.

1) The child tax credit is a $1,000 credit that can be claimed for each qualifying child. Whether a child is a "qualifying child" depends on whether they meet IRS criteria regarding the:

  • Child's age;
  • Child's relationship to parent claiming the credit;
  • Amount of support the child provided to his own care;
  • Child's dependent status;
  • Child's citizenship; and
  • Child's residence.

The child tax credit is only available to the parent who claims the child as a dependent on his income tax return. If the custodial parent waives her right to claim the child as her dependent, she also waives the right to the child tax credit.

2) The exclusion for child or dependent care benefits is only available to the custodial parent, and cannot be waived. This exclusion allows for up to $3,000 in expenses for one qualifying dependent (up to $6,000 for two or more) to be claimed on the income tax return. A qualifying dependent for purposes of the childcare or dependent care benefit is a child under age 12 or a dependent who is physically or mentally incapable of self-care. The exclusion is only allowed for expenses that were paid while the parent worked or was looking for work; babysitting expenses so the parent could attend non-work related functions are not allowed.

3) The earned income credit is available to any taxpayer who meets the IRS' financial criteria, but the amount of the credit increases if the taxpayer has dependents. Like the child and dependent care exclusion, for purposes of the EIC, only the custodial parent can claim the child, regardless of whether she also claims the child as a dependent.

Ventura Child Custody Attorney

As this tax issue demonstrates, family law decisions made in the event of a divorce or relationship break-up can affect one's life in a variety of ways. For this reason, it is critical to seek out the aide of an experienced child custody attorney to ensure your rights are protected. It is also highly recommended that you discuss these important tax issues with your CPA or tax professional. Contact our firm today to schedule a consultation with one of our experienced attorneys at: (805) 464-7315.