The conversation regarding which parent should claim the children as dependents has changed dramatically since the recent tax reform, effective January 2018, eliminated the personal exemption. Yes, that $4,050 (in 2017) tax exemption per child is gone. Parents will not even get that exemption for themselves. This is causing extensive confusion among attorneys and clients alike. The Parenting Plan template has not been revised to reflect this and still contains an entire section dedicated to which parent will “claim the exemptions.” The new answer to that is “Neither one.”
However, other tax benefits related to child dependents have gained new importance and must be taken into consideration when negotiating which parent claims the children as dependents. The overall goal is to maximize tax benefits between the parents and minimize combined taxes paid and the financial needs of either parent. The primary residential parent will be able to file as Head of Household and take advantage of the increased standard deduction of $18,000 which is intended to surpass most itemized deductions. In the eyes of the IRS, the head of household provided a home for the child for a majority of days during the year, except that “days” really means nights. They count the number of nights the child went to bed at the parent’s home, regardless of where the child spent any number of hours per 24-hour day. The parent who files Single will have a standard deduction of only $12,000. By this measure alone, the child deduction may be worth $6,000 to the Head of Household filer. In the case of more than one child, perhaps each parent may qualify as a head of household.
The Child Tax Credit, not an income deduction but a credit against the final tax obligation, has doubled to $2,000 per child under age 17. It is available to the parent who claims the child, only if their income is less than $200,000. The credit is refundable up to $1,400 which means if the parent has no tax obligation, they will receive $1,400 from the government. For children over age 17, the credit is $500 and not refundable.
The Child and Dependent Care Credit of up to $3,000 per child under age 13, for qualified child care expense, is available only to the primary residential parent, regardless of who ultimately claims the child as a dependent. It is not refundable.
The Earned Income Credit, from $3,400 with one child to $6,300+ with 3 or more children, is available only to the primary residential parent having income below $54,000 (not including alimony). Additional qualifications apply and it is refundable.
These are only a few of the child-related tax benefits that may, or may not, be available depending upon the conditions of the parenting plan. More money paid in taxes is less money for both parents and the children. It is not unusual to have $10,000 - $15,000 per year at stake in these decisions.