Federal Tax Dependency Exemption and the Child Tax Credit in Child Custody Decisions

The general Federal rule followed by the Internal Revenue Service is that the custodial parent is entitled to claim the exemption and child tax credit.

As many already know this is not as straightforward as it sounds because these days, child custody disputes end in many different types of custodial arrangements.  Custodial arrangements can range from split physical custody orders that have one or more children with each biological parent to joint physical custodial arrangements with any given child spending up to 50% of their time with one parent and the remainder with the other parent.

Court Ordered Child Custody Arrangement

DivorceThe first thing to understand is the concept of joint legal custodian.  Joint legal custodian is the right of parents to participate in major decisions affecting the child and the right to be informed of the child’s school progress or medical situation.  It is not part of the analysis about who gets the tax exemption because the tax exemption and the child tax credit are determined based on the court ordered physical child custody arrangement.

The second thing to know is that parents can make an agreement to change who will get the dependency exemption that the Internal Revenue Service will accept.

Why You Might Give up the Tax Exemption

There are a number of reasons why a parent may give up the dependency exemption that they are otherwise entitled to have.   First, in order to gain a concession on the custodial arrangement itself a parent may concede to the exemption being awarded in alternate years.

Second, there are often differences in the effect of claiming the exemption on each parent’s tax burden because parents are often in different tax brackets.   Thus it is possible to shift the exemption from the parent who has custody to the parent having the higher tax burden in exchange for sharing the financial windfall that can result from the shift. This analysis often requires the expertise of a family law attorney and an accountant.

Have This Arrangement Addressed in Court

There is a substantial advantage to having this kind of arrangement addressed in either a Judgment of Divorce or a Modification of Child Custody Order.  If a parent does not have it reduced to an actual Court order, then each tax season becomes a new occasion for a new disagreement.  If both  parent’s claim the exemption without a court order or at least a written agreement for a given tax year, the Internal Revenue Service will schedule a hearing to determine who by way of the general Federal rule can claim the exemption.

States have varied about whether a parent can force another parent to reach an agreement about the dependency exemption when there is child custody.  In Michigan, the Courts have ruled that a state court can require parents to change the dependency exemption in a way that differs from the standard Federal rule.   The Michigan Courts have also ruled that the parents can reach an agreement that is different than the Federal rule and it will be enforced.

Anytime a parent is in a case where their child’s custodial arrangement is at stake, parents should address this issue in their final court order.  For help in this area of family law in Northern Michigan call Vincent J. Maloney at 231-947-3331.