Tax Issues in a Divorce
Divorce has many legal implications for divorcing spouses. Included in these is the effect a divorce will have on taxes. Although a divorce gives rise to several tax issues I will focus on only two. The first is whether paying or receiving child support affects the divorcing spouses and the second is how children are to be claimed on a tax return after a divorce.
The first issue is rather simple. Child support has no tax effect to either parent. Hence, the parent who receives child support from an ex-spouse does not have to declare the support as income on the tax return. The parent who pays the child support is not entitled to claim a deduction for the child support paid to the ex-spouse.
The issue regarding how children of divorced parents are claimed on a tax return is a little more complicated. In the past, ex-spouses would argue over who would be able to claim the child as a dependent on the tax return. This was important because the law provided for an exemption for each claimed dependent which in turn reduced the tax liability. The 2017 tax law did away with personal exemptions starting in 2018 and provided a larger standard deduction based on filing status (single, married or head of household). It is important to note that unless this provision is extended or made permanent by Congress, the deduction for personal exemptions will be returning for tax years beginning on January 1, 2026.
Even though the exemption deduction is not currently available, determining which parent in a divorce is entitled to claim the child as a dependent is still important in determining the filing status of the parent and determining which parent gets to claim the child tax credit, the dependent care credit and the earned income credit. Therefore, it is important to know how the IRS determines a child’s dependency status in the case of divorced parents. In order for a child to be claimed as a dependent by a divorced parent the following requirements must be satisfied:
- A parent cannot claim a child as a dependent if that parent is being claimed as a dependent by someone else. Hence, a divorced parent who goes to live with mom and dad after a divorce cannot claim a child as a dependent if mom and dad are claiming the parent of the child as a dependent on their tax return.
- A parent cannot claim a child as a dependent if the child is married and filed a joint return.
- The child must be a US citizen, US resident alien, US national or resident of Canada or Mexico.
- The child must be the parent’s son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, or a descendant of any of these.
- The child must be:
- under age 19 at the end the year and younger than the parent seeking to claim the child as a dependent, OR
- under age 24 at the end of the year, a student and younger than the parent seeking to claim the child as a dependent, OR
- any age if the child is permanently or totally disabled.
- The child must have lived with the parent seeking to claim the child as a dependent for more than half of the year.
- The child cannot have provided more than half of his/her own support during the year.
In the case of divorced parents, the child will generally be the dependent of the custodial parent because of the residency requirement (#6 above). In order for the child to be the dependent of the non-custodial parent the following requirements must be satisfied:
A. The parents are divorced or legally separated under a decree of divorce or separate maintenance, or are separated under a written separation agreement or lived apart at all times during the last 6 months of the year.
B. The child received over half of his/her support for the year from the parents.
C. This child is in custody of the parents for more than half the year.
D. (i) For divorces after 2008: The custodial parent signs IRS Form 8332 stating that he/she will not claim the child as a dependent for the year and the noncustodial parent attaches the form to his/her tax return.
(ii) For divorces after 1984 but prior to 2009: Instead of IRS Form 8332 the noncustodial must attach to the return a copy of the decree or agreement that states that the noncustodial parent may claim the child as a dependent, that the custodial parent will not claim the child as a dependent and the years for which the noncustodial parent can claim the child as a dependent. The signature page of the agreement bearing the date of the agreement and the custodial parent’s signature must also be attached to the return.
(iii) For divorces prior to 1985: In order for the noncustodial to claim the child as dependent the divorce decree or separation agreement must provide that the noncustodial parent can claim the child as dependent, the agreement was not modified after 1984 and the noncustodial parent provided at least $600 of support during the year.
A child will be the dependent of a noncustodial parent who meets all the requirements (A-D) above. This result would entitle the noncustodial parent to claim the child tax credit for the child and, although it was phased out by the 2017 tax act, the additional child tax credit. However, the noncustodial parent would not be entitled to claim the dependent care credit or the earned income credit even if all the above requirements are satisfied. These credits would be claimed by the custodial parent. In addition, the fact that the child is considered a dependent of the noncustodial parent because of these provisions does not entitle the noncustodial parent to file a return as head of household unless he/she otherwise qualifies.