The post discusses how the Indiana Child Support Guidelines deal with which parent gets the right to claim children as dependents and receive the corresponding exemption, as well as other tax credits and deductions. There were changes to the law effective July 1, 2011.
Keep in mind that the parents can agree how to share the right(s) to claim. Before we get to the discussion, there are some important tax forms and publications for parents of children to consider.
RULES AND FORMS
- I highly recommend reviewing the IRS Publication 501, which provides important details and tax rules related to children.
- See IRS Publication 503, which provides the tax rules related to claiming your child's day care or other work-related child care expenses.
- Here is a link to the Form 8332, which is the form that must be completed if you need to transfer the right to claim a child or children to the other parent.
- The last IRS link is to Publication 970, which describes the tax benefits you may be eligible to claim for education related costs and events. Don't skip this one, because you may be eligible for tax credits (read: cash) for education costs you paid for yourself or a dependent.
How the Guidelines deal with the right to claim....
The Indiana Child Support Guidelines were amended on January 1, 2010. The guidelines include the following language regarding the right to claim their child(ren) as dependents for tax purposes:
Tax Exemptions. Development of these Guidelines did not take into consideration the awarding of the income tax exemption. Instead, it is recommended that each case be reviewed on an individual basis and that a decision be made in the context of each case. Judges and practitioners should be aware that under current law the court cannot award an exemption to a parent, but the court may order a parent to release or sign over the exemption for one or more of the children to the other parent pursuant to Internal Revenue Code § 152(e). To effect this release, the parent releasing the exemption must sign and deliver to the other parent I.R.S. Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents. The parent claiming the exemption must then file this form with his or her tax return. The release may be made, pursuant to the Internal Revenue Code, annually, for a specified number of years or permanently. Judges may wish to consider ordering the release to be executed on an annual basis, contingent upon support being current at the end of the calendar year for which the exemption is ordered as an additional incentive to keep support payments current. It may also be helpful to specify a date by which the release is to be delivered to the other parent each year. Shifting the exemption for minor children does not alter the filing status of either parent.
The noncustodial parent must demonstrate the tax consequences to each parent as a result of releasing the exemption and how the release would benefit the child(ren). In determining when to order a release of exemptions, it is recommended that at minimum the following factors be considered:
(1) the value of the exemption at the marginal tax rate of each parent;
(2) the income of each parent;
(3) the age of the child(ren) and how long the exemption will be available;
(4) the percentage of the cost of supporting the child(ren) borne by each parent;
(5) the financial aid benefit for post-secondary education for the child(ren); and
(6) the financial burden assumed by each parent under the property settlement in the case.
These concepts previously existed in statutes and Indiana case law, but they were difficult to reconcile, thus, typically the custom was to have the parents alternate the right(s) to claim where there were a odd number of children, or split the right(s) where there were an even number. Now, the Guidelines suggest that judge should consider how shifting the right will make the most money available for the child(ren). There are disputes regarding this. For example, at some income levels the value of the right to claim "phases-out" so the right to claim is not worth as much to that parent. Also, there are other tax deductions and/or credits that follow the the parent who has the right to claim. Consider having an accountant or other tax professional testify regarding the overall tax effect if the amounts are significant.
Effective July 1, 2011, the court must specify in a child support order which parent of a child may claim the child as a dependent for purposes of federal and state taxes. This law also clarified that a court must specify that the noncustodial parent of a child may claim the child as a dependent and order the custodial parent of the child to take all actions necessary to release the custodial parent’s claim to the exemption in the manner required under federal law. Finally, the law also requires a court to include in a court order that a parent who is ordered to pay child support may only claim the child as a dependent if the parent has paid at least 95% of the parent’s child support for the calendar year for which the parent is ordered to claim the child as a dependent by January 31 of the following year.
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