It’s a common situation in Southern California. A married couple does its own divorce, and nobody thinks about who gets the income tax deduction for their son. Until the next April 15 when both parents claim little Johnny. Well he’s living with Mom, so she feels justified in taking the deduction. But Daddy is paying to support little Johnny, so he feels he should have the deduction. Perfectly logical.
So both parents take Johnny as a deduction. And then they both receive letters from the IRS; their worst nightmare. How, you might ask, do they decide? Will, the IRS do the King Solomon solution? Mommy, you have the deduction, but Daddy gets the child care credit since he’s paying the preschool? Mommy, since your income is low, you get the earned income credit, but Daddy gets the “child tax credit?” Well, maybe! But they do have some basic rules.
The first rule: There is now one standard for qualifying child for all of these parental benefits. If the child is yours, lives with you for more than 6 months, is under 19 years old and doesn’t provide his/her own support, Bingo, you get all the benefits. If there’s a court order, of course, one follows that.
There are five different tax benefits from having children: (1) the dependency deduction; (2) the earned income credit; (3) the right to claim head-of-household status; (4) the child care credit; and (5) the exclusion from income for child care assistance payments. But each has to be qualified for, and there are restrictions on each benefit. If unmarried or divorcing parents want to maximize their tax savings, it would be advisable for them to seek tax advice as part of a divorce settlement. The results under the new law are not either common sense or intuitive.
OK to break here, or after any one of the examples shown below....
Now we get to the unusual situations where King Solomon might have a role in deciding.
Example #1: Johnny, Mommy and Granny all live together. Mommy and Granny both work. Mommy claims Johnny for the Earned Income Credit. Granny gets no deduction or credit. But what if Mommy doesn’t claim Johnny for any purpose. King Solomon says that Granny can now have the Earned Income Credit (if her income is in the right range), and she can have head of household, the dependency deduction and the child tax credit.
Example #2:: Johnny still lives with Mommy and Granny. Mommy gives Daddy the right to claim Johnny (in writing, of course...and Daddy must attach the document to his tax return). How does Daddy get a benefit from all the support he’s paying? King Solomon says that Daddy gets the dependency deduction and child tax credit. But Mommy can get the Earned Income Credit, the child and dependent care credit, and Head of Household status! Granny, however, gets zero benefit from this arrangement.
Example #3: Now it gets bizarre. Mommy and Daddy decide to separate after June 30, and Mommy and Johnny live together the rest of the year. But there’s no divorce or separation agreement filed with the court. Both claim little Johnny. Result? King Solomon now says that neither parent can have head of household, earned income credit or the child and dependent care credit. Mommy gets the dependency deduction and the child tax credit because Johnny lived with her the entire year. But if Mommy doesn’t claim Johnny, then Daddy can have the dependency deduction.
I could go on, but I think you have enough for the article!!!
My references to King Solomon relate to the Bible story about the two mothers fighting over one child, and the King offers to cut the baby in half...