Claiming Children for Tax Purposes in Divorce & Paternity Cases

While parenthood has many benefits, children can be very expensive. Thankfully, I.R.S. rules allow parents to claim their children as dependents and claim child tax credits on their tax returns. However, big changes are coming to how we claim our children thanks to the Tax Cuts and Jobs Act of 2018. While a simple web search can provide lists of all these changes, many of those facing divorce or separating from their child's other parent have a bigger question: "Who gets to claim the child[ren] this year, now that we are living apart?"

First, it’s important to recognize that, in the end, a married couple's tax return refund is likely to be considered to be a marital asset, and tax liability is likely to be considered a marital debt until their divorce is finalized. As part of the divorce process, the court will split a married couple's assets and liabilities acquired during the marriage fairly and equally using a process called "equitable distribution."

What this means is if a couple has a divorce pending and one parent files their taxes as "single" instead of "married," claims the children as dependents (plus other applicable credits), and pockets the entire tax refund, that sizeable tax return is likely to be viewed as a "marital asset,” which must be split between both of them. As a result, that parent may end up having to cough up half of the refund.

To complicate matters further, when the other parent that was not able to claim the children incurs a tax liability, that tax bill will have to be split up as well. Worse still, a court could sanction the parent that tried to "pull a fast one" and claim the children first, resulting in potentially even steeper consequences. This emphasizes the need to act fairly and in good faith when negotiating and navigating a divorce.

How to Properly Handle Tax Credits

As you can see from this scenario, it’s best to coordinate with each other on who claims the children as a dependent since both parents are going to be on the hook for the money. Sometimes tax matters can be mutually negotiated and agreed upon, and in some cases, a court will help balance out tax liabilities and refunds as much as possible. However, ultimately you’ll need to come to an agreement that fits your own demands and life situation.

But what if the parents cannot agree or work together on the dependents and credits? They are getting divorced after all - irreconcilable differences are the norm here. What does a court do? Most of the time the court will have the parents simply alternate who claims the children from year to year, or each parent will claim an even number of children (for example, if parents have two children, the mother and father would each claim one).

This is of course unless there is a compelling reason why one parent should get to claim the children every year. For example, one parent might not work or may earn at the state's minimum-wage level, at which point there isn’t much benefit of claiming the child(ren) compared to the other parent. Perhaps the means of one parent are not enough to support the children, and it would only be fair that the other parent claim the children every year since they are not receiving much in terms of child support. Or maybe the court did not appreciate the one parent running out and claiming the children first and "pulling a fast one" like in the above scenario and as punishment the court orders that the other parent gets to claim the children every year. Each of these is a possibility.

What if the parents aren't married? If paternity and time-sharing (custody) matters have never been brought up before a court, the mother has every right to claim the child(ren), because the father has no rights regarding the children until paternity has been officially established in court. This is yet another reason why it’s so pivotal that fathers establish legal paternity over their children as soon as possible.

Pending Divorce Decisions

If your divorce case is pending, the Court is likely to do the same as discussed above - alternate who claims each year unless there is a compelling reason not to. One interesting thing to note is that while I.R.S. rules require that the claimed child must reside with the claiming parent for more than half the year, courts regularly order the parents to alternate the tax credit, despite the timesharing (custody) arrangements. Parents regularly make claims in this fashion, despite not perfectly adhering to the established rules.

Further complicating the matter is that under the Tax Cuts and Jobs Act, dependency claims will be completely eliminated in the 2018 tax year! There is also belief that these tax rules may be enforced more strictly, possibly not allowing alternating claims of children when the residency rules are not met. However, child tax credits are actually increasing, and portions may be refundable.

While the examples discussed here are somewhat common, they are by no means perfect and your own case will have unique circumstances that will influence the agreement that’s right for your situation. It’s best to discuss these issues with a Florida family law attorney and your accountant.