Divorce is a difficult, often messy process that requires many tough decisions. Who will get which assets? Who will be responsible for which debts? Where will the children live, and how often will they see the other parent? The list of questions goes on and on. The question of child custody is one that every Kansas City divorce attorney knows well, and there is more to it than just where the children will live. Federal tax law states that the parent with whom a child primarily resides may claim that child on their taxes after a divorce as a dependent. The parties to a divorce may agree to a different arrangement, or a Missouri court may order that one parent have the right to claim the child. Either way, the arrangement must be compatible with state and federal law. Although Congress recently changed federal tax law in several important ways, this is an issue that must be addressed in every divorce case involving minor children.
Federal law has three main income tax benefits for parents: the personal income tax deduction, the child or dependent tax credit, and the Earned Income Tax Credit (EITC). The amount of the deduction is subtracted from a taxpayer’s total taxable income before tax is calculated. A tax credit is subtracted from the final amount of tax that is due.
We will address this in greater detail below, but Congress has suspended all personal income tax deductions, beginning with tax year 2018. This suspension will expire in 2025, and Congress could amend the law again before then. For the time being, though, there is no personal tax deduction.
In order for a taxpayer to claim any of these benefits, they must be able to claim a “qualifying child.” Section 152(c) of the Internal Revenue Code (IRC) defines a “qualifying child” as someone who is under the age of nineteen, or twenty-four if they are a student; who resides with the taxpayer for more than half the year; and who receives at least half of their support from the taxpayer.
If the child’s parents are not filing a joint tax return, only one of them may claim the child as a dependent. Since these benefits, especially the tax credits, can translate into significant reductions in one’s tax bill, the question of who may claim a child or children can be quite contentious.
The IRC addresses the child tax deduction for divorced parents in § 152(e). The custodial parent has the right to claim the child as a dependent for tax purposes unless they release their claim to the deduction by signing an IRS Form 8332.
Missouri law has nothing to say specifically about the allotment of federal tax benefits in divorce, since federal law controls those issues. The main issue presented by state law comes up when the parties ask the court to approve an agreed divorce decree, or when they go to trial. The court must find that any provisions relating to a child are in that child’s “best interest.” Please note that the terms “custodial” and “noncustodial,” as used in a federal statute, might not have the same specific meanings as under Missouri law or another state’s law. Section 152(e)(4) specifies that “custodial” means having custody of a child for more than half of the calendar year, and “noncustodial” as not being the custodial parent.
State law does not provide a specific definition of the “best interest of the child,” but it does provide courts with an extensive list of factors to consider when evaluating whether a particular proposed arrangement is in a child’s best interest. This list does not mention tax deductions or tax credits, but it could still be a factor, depending on the circumstances of a particular case.
A noncustodial parent can claim the personal tax deduction (see below) and the child tax credit, provided that the custodial parent has released their claim to those benefits. The EITC, however, is usually only available to the parent with whom a child lives for more than half of the year. A custodial parent cannot sign that benefit away as easily.
The Tax Cuts and Jobs Act (TCJA) of 2017, which was signed into law in December of that year, made substantial changes to the IRC. Many of those changes will affect people’s 2018 tax returns. As noted earlier, this bill amended § 151(d)(5) of the IRC to suspend all personal tax deductions until the end of calendar year 2025. The deduction still exists, but for now, the amount of that deduction is zero.
There is good news, however. The TCJA increased the standard deduction for an individual taxpayer to $12,000. This is the tax deduction available to anyone who does not itemize other deductions on their tax return. This increase, which is almost twice the amount of the standard deduction in 2017, is effective from 2018 through 2025, as stated in § 63(c)(7) of the IRC.
The TCJA also doubled the child tax credit, from $1,000 to $2,000 per qualifying child, for the period from 2018 to 2025. This is covered in § 24(h) of the IRC. The new law did not change the Earned Income Credit.
If a divorce decree awards tax benefits to the custodial parent, they may simply claim the child or children on their taxes. If the noncustodial parent receives the benefits, they must obtain a Form 8332, signed by the custodial parent, and include it with their tax return. This form works for both the personal tax deduction and the child tax credit. If necessary, a court can direct a parent to sign this form as an obligation of the divorce decree.
Mark A. Wortman is a family law attorney whose practice focuses exclusively on divorce, child custody and other family law matters in the Kansas City, Missouri area. To schedule a confidential consultation with an experienced legal advocate, please contact us online or at (816) 523-6100.