Child Tax Credits and Separation or Divorce

Some taxpayers, and particularly parents, are able to take tax credits - that is, direct reductions in what they might owe in taxes - for other persons that they take care of or are responsible for. For the most part, the credits are for minor children, such as the Child Tax Credit and the Earned Income Credit ("EIC"). However, the Dependent Care Credit can be taken for persons other than children.

Each credit has various requirements that have to met in order for a taxpayer to be qualified to take it. The requirements range from things like where the child or dependant lives to how much money the taxpayer actually spends on supporting the child or dependant.

These requirements often become complicated for divorced or separated taxpayer-parents, and sometimes it's hard to determine who, if anyone, can take any or all of these credits.

Dependent Care Credit

An individual for whom there are one or more "qualifying individuals" is entitled to a dependent care credit. "Qualifying individuals" include dependents under 13 years of age, and other dependents or spouses who are incapable of caring for themselves and who have the same principal abode, or home, as the taxpayer for more than one-half of the taxable year.

The credit is a percentage of the costs of household and dependent care services, otherwise known as "employment-related expenses," that are necessary for gainful employment. The specifics of the credit are:

• The percentage of qualifying expenses eligible for the credit is 35 percent, which is reduced, but not below 20 percent, by one percentage point for each $2,000 or fraction of that amount by which the taxpayer's adjusted gross income for the taxable year exceeds $15,000
• The maximum credit for a year is $3,000 if there is one qualifying individual and $6,000 if there are more than one
• The maximums are reduced by the amount of income received by the taxpayer for dependent care assistance that is excluded from gross income under Internal Revenue Code (IRC) § 129

Other limitations and reporting requirements apply as well, so you need to be certain to read the laws carefully if you are in doubt as to whether you can claim the deduction.

Important for divorced or separated parents is the fact that a taxpayer is not required to maintain a household in order to claim the credit. So, as long as the other requirements are met, a taxpayer can claim the credit with respect to a child who lives with the taxpayer for more than one-half of the year, even if the taxpayer does not pay more than one-half of the cost of maintaining the household.

Also, with respect to divorced or separated taxpayers, special rules apply for the credit. First, although married taxpayers generally need to file a joint return in order to claim the credit, an individual who is legally separated from a spouse under a decree of divorce or separate maintenance is not considered as married, and may therefore claim the credit on a separate return. An individual is also not considered as married if all of the following requirements are met:

• The individual is married and files a separate return
• The individual's home is a household that is the principal place of abode of a qualifying individual for more than one-half of the tax year
• The individual pays over one-half of the cost of maintaining that household for the year, and
• During the last 6 months of the taxable year the individual's spouse is not a member of that household

A special dependency test also applies for divorced or separated parents. A child can be a qualifying individual with respect to only one parent, and so only one parent can claim the credit. If the parents are divorced or legally separated, and the child is under the age of 13 or is disabled, a child for purposes of the credit is considered a dependent of the custodial parent.

The release of the dependency exemption by a custodial parent under IRC § 152(e) does not entitle the non-custodial parent to claim the dependent care credit.

Child Tax Credit

Taxpayers with incomes below certain threshold amounts are eligible for a $1,000 credit for each qualifying child who has not attained the age of 17. Whether a child is a "qualifying child" is determined under the dependency exemption provisions, except for the age 17 limit.

This credit is refundable to the extent of 15 percent of the taxpayer's earned income in excess of $10,000. The refundable credit is calculated differently for families with three or more children, so be certain to read the laws carefully if you fall into this situation.

For divorced or separated parents, it is important to know that if a custodial parent releases the dependency exemption for a child to a non-custodial parent, the non-custodial parent will also be entitled to claim the child tax credit for that child.

Earned Income Credit

Eligible taxpayers are can claim a credit that is equal to a specified percentage of the taxpayer's earned income. Calculating this earned income credit (EIC) is too complicated to address here, so it is important to read the laws carefully or consult a tax professional if you are in doubt about talking this credit.

Nevertheless, here are several aspects of the credit that are important for taxpayers who are divorced or separated:

• The number of qualifying children a taxpayer has plays a role in applying the credit percentage and the earned income amounts used computing the credit
• For purposes of determining whether a child is a "qualifying child," the same definition of a "qualifying child" for purposes of the dependency exemption applies for purposes of the EIC, except that the requirement that a child not provide more than one-half of his or her own support does not apply
• A dependency exemption release does not apply to the earned income credit, and so the custodial parent's release of the dependency exemption for a child does not entitle the non-custodial parent to take that child into account when calculating the EIC

Ready to Proceed?

Divorce or separation can have a dramatic impact on your ability to take certain tax credits. As with dependency exemptions, if the availability of credits for dependent care, child tax, or earned income are not cut-and-dry in your situation, it is critical that understand the Internal Revenue Code provisions completely before taking any of the credits.

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