U.S. tax law provides parents with a federal child tax credit as a way to reduce their federal taxes and help them more easily support their children. When parents are married, there are usually no conflicts or concerns over who utilizes the credit on their tax return since married couples generally file a joint return to which they both benefit. However, during separation, if the parties are filing separately and after the divorce, this can become an issue because the credit is only available to the parent deemed to have primary custody of the children. As a result, it is important to understand the rules and possible compromises regarding who can take the federal child tax credit when parents divorce.
What Are the IRS Rules Regarding Which Parent Can Take the Federal Child Tax Credit?
When determining who can take the tax credit if married filing separately and/or after the divorce, the IRS looks at the number of overnights a child has with each parent during the year. The parent who spends more than 183 nights with the child or children is entitled to the credit unless the custodial parent signs an IRS form consenting to allow the other parent to use it.
Often, parents don’t understand the law and both parties will try to take the tax credit. However, not only will this delay the processing of the tax returns but it may also trigger a tax audit. As a result, it is crucial to discuss this issue and negotiate a solution in the separation or divorce settlement agreement so these kinds of problems can be avoided.
How Can You Resolve Disputes Over Who Can Utilize the Federal Child Tax Credit?
There are several straightforward options for resolving this issue. These include:
- Alternating years. Parents can switch off who gets to take the child tax credit every year.
- Splitting use of the credit for multiple children. If there is more than one child and an even number of children, then each parent can utilize the credit for half the number of children (i.e., one parent gets the tax credit for one child and the other for the second child).
- Combining both options. Where there are an odd number of children, the two solutions can be combined. For example, with three children, each parent can use the credit for one child and then alternate years for the third child.
It is essential to consider the tax ramifications of separation and divorce settlement agreements. A settlement that seemed fair on its face may not be once taxes are considered. Consulting an experienced divorce attorney and a financial expert will help ensure you negotiate the best result under federal and state tax laws. Contact us to learn how we can help you achieve a positive outcome in your divorce.