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Dividing Dependent Child Tax Exemptions

As most taxpayers with children probably know, the IRS allows parents to claim a portion of their income as exempt from taxation for each minor child that they can claim as a dependent. In 2014, the amount of income exempted from taxation was $3,950 for each child. The higher one's tax rate, the more valuable that exemption is to one's tax savings.

Parents of minor children, whether divorced or never married, should be cognizant of the fact that federal and Virginia law allows child dependency tax exemptions to be divided between the parents for federal tax purposes. It is not uncommon for parents to agree or a judge to decide that a dependency exemption will not always be claimed by the parent entitled to claim it under the IRS's rules. It may seem like a relatively minor issue in the grand scheme of child custody and support, but it can have significant repercussions to both parents.

First, the IRS's default rule is that the custodial parent - the parent with whom a child resides for more than half of the time - is the parent entitled to claim a tax exemption for the child. If the parents have the children an equal number of nights, then the "custodial parent" is the parent with the higher adjusted gross income. However, the IRS does permit the custodial parent to sign a written declaration - IRS Form 8332 - stating that he or she will not claim the child as a dependent for the year, which then allows the non-custodial parent (the parent who has the child less than half of the year) to claim the child. If there are multiple children, the custodial parent does not have to give up the exemption for all of the children; it is not "all or nothing." Virginia law allows a judge in a child support case to award the tax exemption in the current year or in any future years to the non-custodial parent, by ordering the custodial parent to sign and deliver IRS Form 8332 to the non-custodial parent.

Very often, assigning a child dependency exemption can be an afterthought in resolving custody and child support matters, where parents are more focused on custodial schedules or the amount of child support to be paid from one to the other. However, given the amount of income that is exempted from taxation for each dependency exemption, determining who claims those exemptions can make a significant difference to the parties' finances. A parent in a much lower tax bracket than the other could find that it does not help him or her all that much, but could provide huge savings to the other, higher-income parent. The parties could agree to give the exemptions to the higher-income parent in exchange for that parent paying the tax savings into a college savings plan, paying a higher amount of child support, or some other arrangement that leaves both parents and the children better off. Parents and their attorneys should consider having a tax preparer or CPA calculate how different assignments of the dependency exemptions - even in different years - could help or hurt each parent.

Additionally, the passage of the Affordable Care Act ("ACA") in 2010 added another wrinkle to this issue. Albeit with some exceptions, the ACA generally requires that individuals obtain health insurance for themselves and their children, or potentially face a penalty. Where a child's parents are not married, the ACA has a means of determining which parent is legally and financially responsible to obtain health insurance on behalf of that child. Specifically, the ACA says that the parent who claims a child for the tax exemption is the parent responsible for making sure the child has health insurance, and who can be penalized if the child is not insured.

Where parents are uncooperative - or downright hostile to each other - and cannot plan together, the foregoing could cause some problems. For example, if the parents give the exemption(s) to the parent with the lower income, that parent is responsible under federal law to make sure that health insurance is provided. If the other parent is the one insuring the children and doesn't provide the lower-income with proof of coverage, whether out of neglect or spite, the lower-income could be hit with a penalty. Even though Virginia courts can order the higher-income parent to provide the health insurance, Virginia cannot stop the IRS from penalizing the parent that the IRS says is responsible.

The above are some - but not all - of the reasons that your attorney should help you to assess whether and how you should consider dividing child dependency exemptions for tax purposes. Please do not hesitate any to contact any attorney at The Duff Law firm if you would like to discuss the above, or any other legal issue that you may have.

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Duff Kronfeld & Marquardt P.C.
11320 Random Hills Road
Suite 630
Fair Oaks Commerce Center
Fairfax, VA 22030

Phone: 703-591-7475
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