Once you are a parent, you never stop being a parent. You stayed up with your kids when they had the flu, helped them study for the ACT, cheered them on at their graduation. You have been there for their highs, lows, and everything in between. You will continue to care, love, and support your children for the rest of your life.
But will there ever be a time they can fly away from the nest?
According to the federal government, the answer is yes! From the time your children were born, you claimed them as dependents on your federal and state taxes, which has saved you money on your taxes over the years. The decision to claim children as dependents rests on a myriad of factors, let’s see how those could affect you this year.
In the Nest – How Long You Can Claim
The federal government allows you to claim dependent children until they are 19. This age limit is extended to 24 if they attend college. If your child is over 24 but not earning much income, they can be claimed as a qualifying relative if they meet the income limits and/or if they are permanently disabled. It is important to know that there is no age limit if your child is permanently disabled.
Other factors that contribute to your ability to claim your children as dependents are:
Amount of time your children live with you
Your child must live with you for at least 6 months before you can claim them as a dependent.
If your child makes more than half of their own support during the tax year, they cannot be claimed as a dependent. This support consists of housing, food, education, medical care, insurance, and recreational spending.
If you are not married and the child lived with you and the other parent half of the time, the person with the highest adjusted gross income will often take the deduction. This, however, can be negotiated.
If you pay child support but the child lives with you for less than half of the year, you cannot claim the child as a dependent unless you have a signed Form 8332.
For many families, the longer they are able to claim their children as dependents the better it will be. But the new Tax Cuts and Job Act has changed the way parents claim dependents. Prior to 2018, parents were able to receive a personal exemption that reduced taxable income. For example, in 2017, a married couple filing jointly could take a $4,050 exemption for themselves and each dependent. The new tax law has suspended that exemption benefit from 2018-2025. This means that parents will need to use other tax exemptions to help make up for the loss of the child exemptions.
Claiming A Child As Dependent After Divorce
Divorce is always difficult, but with children, the level of complexity increases, especially around tax time. It’s common for parents to wonder who can claim a child on their taxes after a divorce. In many cases, your divorce judgment will provide guidance, but you’ll also need to follow the Internal Revenue Service’s (IRS) rules to reduce the risk of an audit.
What are the Benefits of Claiming a Child on Your Taxes?
Parents overwhelmingly agree that raising children is expensive, regardless of where you live. To help offset the costs, the tax code offers parents a variety of tax credits that could reduce a parent’s taxable income and result in a sizable refund at the end of the tax year.
Beginning with the 2018 tax year, the Tax Cuts and Jobs Act (TCJA) implemented significant changes to the tax code, including eliminating the personal exemption. To replace the loss of the personal exemption, the tax code nearly doubled the standard deduction. So, claiming a child in 2020 doesn’t have the same impact it would have had in 2012. Parents may qualify for the child tax credit, additional child tax credit, earned income credit, dependent care expenses, or a head of household filing status.
What Are the IRS Rules for Claiming Dependents?
In addition to knowing whether you can make a tax claim for your child, you and your child will need to pass these IRS tests to make sure you qualify as far as the IRS is concerned:
Relationship: The dependent must be your son, daughter or foster child; or a descendant such as a grandchild, brother, sister or step-sibling; or an extended descendant such as a nephew.
Age: The child must have been under 19 years old and younger than you or have been under 24 years old, a full-time student and younger than you in 2018. You can claim a child who was permanently and totally disabled in 2018 regardless of age.
Residency: The child must have lived with you more than 50% of the year.
Support: The child must not have provided more than 50% of their own support over the year.
The Child Tax Credit
The new tax code doubled the Child Tax Credit amount from $1000 to $2000 per child. The tax credit is non-refundable, meaning that it only impacts your overall taxable income. Unlike other deductions, the child tax credit will only reduce your tax liability to $0 and will not, on its own, result in a refund. Some parents will use the entire $2000 benefit by not paying much or anything back to the IRS.
Additional Child Tax Credit
Parents with lower income may only need a portion of the child tax credit to benefit from the tax break. In that case, the parents can also apply for the Additional Child Tax Credit (ACTC). The ACTC is misleading because many parents believe you have to have more than one child to utilize the credit. Instead, the ACTC is available to parents who claim the child tax credit but don’t use the entire $2000 benefit. If qualified, the parents can receive up to $1400 per child as a refund after the initial child tax credit is applied. The credit is only available to parents if the refund equals at least 15% of the parent’s taxable earned income.
Earned Income Credit
The Earned Income Credit (EIC) is available to parents (and non-parents) who work and have earned income under $55,952. The tax credit typically leads to more money in your pocket at the end of the tax year and may also reduce the amount of taxes you owe the IRS. To claim the EIC, you must meet specific income and other requirements. For more information on the EIC, and to determine whether you qualify, visit the IRS website.
Child and Dependent Care Expenses
In some cases, parents may qualify to claim a child’s daycare or other work-related expenses throughout the tax year. Typically, only custodial parents qualify for care expenses credits and must demonstrate that the child lived with the parent for at least six months of the year.
Head of Household
Parents may also qualify to change their filing status to “Head of Household” instead of Single. When you file as Head of Household, your tax rate is usually lower than that of someone filing as Single or Married Filing Separately. You will also receive a higher standard deduction than if you file using another status.
To file as a Head of Household, the IRS requires you to meet all of the following requirements:
• You are unmarried on the last day of the year (December 31)
• You paid more than half of the expenses to keep up your home during the year, and
• A qualifying person (dependent) lived with you for more than half the year.
For the IRS to consider you “unmarried,” you must meet the requirements above and:
Your spouse must not have lived in your home for the last 6 months of the year.
What’s Required to Claim a Child on Your Taxes?
First, your child must qualify as a “dependent” under the IRS rules. You can read more about the qualifications of a dependent in IRS Publication 501. For a more in-depth look into the rules of claiming a child, review IRS Publication 929, Tax Rules for Children and Dependents.
The Child Tax Credit
In addition to being a qualified dependent, the child must meet the following requirements to qualify for the full $2,000 Child Tax Credit:
• The child has to be under age 17 at the end of the year
• You must claim the child as a dependent on your return
• The child can’t have provided over half of their own support for the year, and
• The child must have a Social Security Number.
If the child turns 17 on the last day of the year, that child is ineligible for the full $2,000 Child Tax Credit but would qualify for the new $500 Credit for Other Dependents.
Child and Dependent Care
To qualify for a tax credit towards your child’s care expenses, you must demonstrate the following:
• The child is a qualified person (dependent)
• You meet the IRS’s earned income threshold for the credit
• You incurred the care expenses while you worked or looked for work
• You made care payments to someone who is not your dependent (you can’t pay another child for daycare and request the care credit)
• You must file as single, head of household, qualifying widow, or married filing jointly, and
• You must identify the care provider’s tax identification number on your return.
What Happens in Cases Where Parents Share Joint Custody?
Usually, the custodial parent gets the benefit of the most tax breaks involving the child. If the parents share custody, it’s common for the custody or divorce order to specify which parent can claim the child.
If the noncustodial parent claims the Child Tax Credit, the custodial parent must complete the IRS form, releasing rights to the credit. Without IRS form 8332, the IRS may reject your request to use the tax benefit. If that happens, and the custodial parent claims the child instead, you may need to go back to court to force the filing parent to give your money back. The IRS doesn’t involve itself in domestic fights over child credits, so it will not help you fight for repayment.
In joint custody situations, parents often alternate the tax credits. For example, a custodial parent will claim the child in even tax years, and the noncustodial parent will claim the child in odd tax years. In families with multiple children, parents can also opt to split the tax benefits for the children. For example, if you have two children, each parent can claim one.
If you’re going through a divorce, it’s important to address these tax issues before the judge finalizes your order. You will still need to provide the IRS with the required forms if you’re claiming a child and are not the custodial parent.
Because the child will presumably live with the custodial parent for more than 6 months of the year, the other parent will not qualify for childcare coverage credits or Head of Household filing status. Additionally, the noncustodial parent will not qualify for the Earned Income Credit unless the parent meets the credit’s other IRS requirements.
Tax year 2020 hasn’t brought any major changes to tax law for divorced parents, but things changed significantly with the implementation of the Tax Cuts and Jobs Act in 2018. Some of the most important changes were in regards to how divorced and separated parents can claim dependents.
Changes Enacted in 2018
When filing taxes, a child belongs to the custodial parent — the parent who has custody the greater part of the year. The other parent is called the noncustodial parent.
The custodial parent gets the bulk of the tax breaks, especially if they file as head of household. A divorced or single parent filing as head of household qualifies for a tax rate lower than if you claim a filing status of single or married filing separately. As head of household, you might be able to claim certain credits such as the dependent care and earned income credit.
Claiming Children on Taxes: What Else Is New?
In 2020, the maximum child tax credit is $2,000 per qualifying child younger than 17 years old on Dec. 31. That’s up from $1,000 under prior tax laws. Dependents must have Social Security numbers, which must be listed on the tax returns. The tax credit begins to phase out at $200,000 of modified adjusted gross income for single filers and $400,000 for spouses filing jointly.
The personal exemption deduction for dependents has been suspended for tax years 2018 through 2025. Although the TCJA eliminates dependent deductions, the law makes up for this loss of tax savings by nearly doubling standard deductions. Take a look at the comparison table:
Dependent Deductions Comparison
Filing Status Standard Deduction as of 2020 Previous Standard Deduction for 2017 and Before
Single $12,400 $6,350
Head of Household $18,650 $9,350
Married and Filing Jointly $24,800 $12,700
Married and Filing Separately $12,400 $6,350
In general, tax credits are better than tax deductions. A tax credit is a dollar-for-dollar reduction in taxes, whereas a tax deduction reduces the income subject to taxes. Say, for example, your income is $15,000 and your tax deductions amount to $5,000. The adjusted gross income you’ll pay taxes on is $10,000.
In the case of the child tax credit, you can deduct the $2,000 from a hypothetical $3,500 tax bill and reduce your bill to $1,500. You can get up to $1,400 of the $2,000 tax credit back as a refund if you’re receiving a tax refund.
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