What are the children worth? A Tax Guide for Divorcing Couples

Divorce brings many changes, and one of the most important tax questions for parents is: Who gets to claim the children? The answer affects not only dependency exemptions (even though the exemption amount is currently zero), but also valuable tax credits like the Child Tax Credit (CTC), Earned Income Tax Credit (EITC), head of household filing status, and more. Here’s what you need to know.

1. General Rule: The Custodial Parent Claims the Child (for Tax Credits)

Under federal tax law, the parent with whom the child lived for the greater number of nights during the year—the “custodial parent”—is generally entitled to claim the child as a dependent. This is true even if the divorce decree says otherwise, unless the custodial parent formally releases the claim (see 2 below)

Definition of Custodial Parent:

• The custodial parent is the one with whom the child lived for the greater number of nights during the year.
• If the child spent an equal number of nights with each parent, the parent with the higher adjusted gross income (AGI) is considered the custodial parent.

2. Special Rule: Noncustodial Parent Can Claim the Child—But Only If…

A noncustodial parent can claim the child as a dependent only if the custodial parent signs a written declaration (usually IRS Form 8332) releasing the claim for that year, and the noncustodial parent attaches this form to their tax return.

• Form 8332 or a similar written statement must be signed by the custodial parent and attached to the noncustodial parent’s return each year the claim is released.
• Divorce decrees or separation agreements executed after 2008 cannot substitute for Form 8332; the IRS requires the form or a substantially similar statement.
• If the custodial parent does not sign and the form is not attached, the noncustodial parent cannot claim the child, even if the divorce decree says otherwise.

Important Note on Head of Household Status:

A custodial parent can generally claim head of household (HOH) filing status while allowing the noncustodial parent to claim the Child Tax Credit (CTC) by releasing the dependency exemption using Form 8332, provided all other requirements for HOH status are met.  You cannot give away HOH status; it must be earned.

Key Point:
The IRS and the courts have consistently held that the Internal Revenue Code, not state court orders, determines who may claim a child for tax purposes.

3. What Tax Benefits Are Affected?

• Child Tax Credit (CTC): Only the parent who claims the child as a dependent can claim the CTC.
• Earned Income Tax Credit (EITC): Generally, only the custodial parent can claim the EITC for a child.
• Head of Household Status: Only the parent with whom the child lived for more than half the year (the custodial parent) can claim head of household status.  You cannot release this with for 8332.
• Other Credits: Credits like the Child and Dependent Care Credit and the American Opportunity Tax Credit also depend on who claims the child as a dependent.  If the non-custodial parent pays for all of the dependent’s college, he/she will not get the credit if they do not get the dependent.

4. Tiebreaker Rules

If both parents claim the child, the IRS will apply tiebreaker rules:

• If only one is a parent, the parent wins.
• If both are parents, the child is treated as the qualifying child of the parent with whom the child lived the longest during the year.
• If the child lived with both parents for the same amount of time, the parent with the higher AGI wins.

5. Special Situations

• Multiple Children: Parents can agree to split the children for tax purposes, but only if the custodial parent releases the claim for each child using Form 8332.
• Remarriage: If the custodial parent remarries, the new spouse’s support is treated as provided by the custodial parent for support tests.

6. Practical Steps for Divorcing Parents

• Keep Good Records: Track where your child sleeps each night. The IRS uses the number of nights to determine custody.
• Communicate: If you want the noncustodial parent to claim the child, sign Form 8332 and give it to them.
• Attach the Form: The noncustodial parent must attach Form 8332 to their tax return every year they claim the child.
• Don’t Rely on Divorce Decrees Alone: The IRS will not accept a divorce decree as a substitute for Form 8332 for post-2008 agreements.

7. What If You Both Claim the Child?

If both parents claim the same child, the IRS will use the tiebreaker rules and may audit both returns. The parent who is not entitled to claim the child will lose the tax benefits and may owe additional tax, interest, and penalties.

8. What does this mean for High-Net-Worth Clients?

For high wage earners, CTC phases out completely at $200,000.00 for single filers.  Many of my non-custodial parents do not lose out on the CTC credit since they would not get it any way.  The only way to benefit from the child for them is to become the custodial parent and claim the HOH status (which taxes income in different brackets than a Single status).

9. Key Takeaways

• The custodial parent (where the child lives most nights) generally gets to claim the child.
• The noncustodial parent can claim the child only if the custodial parent signs and provides Form 8332.
• Divorce decrees do not override IRS rules.
• Only one parent can claim each child for tax benefits each year.
• Keep records and communicate to avoid costly mistakes.