When couples separate, divorce, or are even unmarried, questions arise at tax time as to who will benefit from the five potential tax breaks. Many believe this can be a verbal agreement however this is not the case. Issues arise and raise a red flag with the IRS, when both parents attempt to claim a child in the same tax year. Not even a written decree of divorce would settle this matter. The IRS allows benefits to be split in claiming a child on the tax return only by using the following: Form 8332.
Five Tax Benefits in Claiming a Minor
- Head of Household: filing status allows taxpayers toincrease their tax-free income by up to $3,000, saving a huge amount, tax bracket based, compared to filing Single status.
- Earned Income Credit: credits taxpayers with children($2 to $6,318) based on income and the number of dependents claimed. designed for lower income taxpayers, eliminating Single & Head of Household filers who earn greater than $39,617 to $48,340 depending on the amount of children(up to 3) claimed.
- Child & Dependent Care Tax Credit: offers a tax deduction to working parents, up to $6,000 in childcare expenses for 2 or more dependent minors. Also income based, taxpayer percentages range from 20-35%; however, the greater the income, the lower the credit.
- Dependency Exemption: taxpayer can claim their child’s dependency exemption on their return. In 2017, each child provided $4,050 of income completely tax free.
- Child & Dependent Tax Credit: income based, offers up to $1,000 per every qualifying child under 17 years of age. Head of Household & Single filers, the credit dissipates with income greater than $75,000, maxing out at $95,000.
Custodial vs. Noncustodial Parents
The IRS determines how the five tax benefits are split between two taxpaying individuals by classifying one as: custodial(child lives with them for most of the year) & noncustodial. These terms exist only to classify where the child resides). Form 8332 must be signed by the custodial parent & the noncustodial parent submit it with their tax return. The IRS will then divide the above five tax benefits between the two in the following way:
- Custodial Parent: (may claim following, if eligible) Head of Household Filing Status, Earned Income Credit, Child & Dependent Care Tax Credit
- Noncustodial Parent: (may claim following if eligible) Dependency Exemption, Child Tax Credit
Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent
The IRS has created this form to clearly state the rules give priority to the custodial parents. Even if noncustodial parents pay chld support or even every household expense; this does not matter to the IRS. It only matters with whom the dependent child lived with for most of the year. The IRS stopped accepting divorce decrees in 2009. The IRS accept a statement, but it must have similar wording to Form 8332.
The layout of 8332 isn’t daunting as one would think. Allows one child per form & is has three parts: releasing a child’s exemption for one year, releasing a child’s exemption for future years, and revoking a previous release. The taxpayers amidst separation & divorce could use Part II, release of claim for future years. They can stipulate “all future years” or put in the number of years up until the child turns age 24. It is still signed by the custodial parent & attached/submitted by the noncustodial.
When e-filing, you can attach Form 8332 to your return through tax software. It will change your e-file transmitting Form from 8879 to 8453. Form 8879 uses a PIN instead of the taxpayers signature to authorize e-filing the return. If the taxpayer has other paperwork to submit along with it, Form 8453 allows them to initially e-file & mail in the required documents separately.
A custodial parent can also use Form 8332 to revoke a prior release form. It will take effect the tax year following it’s receipt by the IRS. Once revoked, it is up to that parent to give the noncustodial parent, a new 8332 for their tax returns. Custodial parent must also keep a dated record of this transaction, along with attaching the revoked Form 8332 to her/his return every filing year until the end of the period of time it was originally released.
In conclusion, Form 8332 allows separated, divorced, & even unmarried parents to benefit from the five tax benefits when claiming a minor child. The form allows the noncustodial parent to retain 2 of the 5 benefits. Taxpayers can create a similar, personal form, using similar wording to 8332. Custodial parent signs off on it, while noncustodial parents need to use this form every filing year thereafter when they claim the child/dependent.