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Understanding the tax implications of child custody

As you and your spouse work toward a fair resolution to your divorce, you may find that determining child custody arrangements proves particularly difficult. Many parents focus on their own desires for the child or focus entirely on emotional and practical issues and completely miss some implications of child custody, sometimes costing them dearly.

Child custody can even affect your tax liability and available exemptions. These can make enormous differences in a parent's yearly tax planning. Before you finalize your custody and parenting agreements, be sure to consider how your role in raising your child may affect your tax returns.

Like all legal and financial matters, it is wise to consult with an expired attorney as you consider your options. You can consult with an experienced attorney to assess how these exemptions may affect you, and how to protect your rights and priorities as parent along the way.

What are the benefits of claiming a child as a dependent?

Claiming a child as a dependent on your tax returns allows you to:

  • file as the head of your household
  • use the child tax credit
  • claim an exemption for the child
  • claim credits for some expenses like childcare
  • claim exclusions in income for dependent care

These are not the only benefits available to parents. Be sure to consult with an experienced attorney to maximize your tax benefits and create a fair parenting and custody plan that represents your rights and the needs of the child.

Who gets the exemptions and credits associated with child custody?

In general, only one parent may claim the same child on his or her tax forms if both parents file separately. This means that you and your spouse cannot pick and choose which benefits each of you use in a given year.

If both parents file separate tax returns and choose to list the child as a dependent, the Internal Revenue Service will apply the exemptions or credits to the parent who held physical custody of the child for the greatest number of days in that calendar year. This means that you may forfeit these exemptions and credits if your child's other parent retains physical custody of the child for even one day more than you do in a given year.

Many parents circumvent this potential conflict by agreeing to simply alternate years claiming the child as a dependent. However you and your child's other parent choose to address the issue, be sure that it is fully addressed before you sign an agreement.

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