By William Perez. Tax Planning: U.S. Expert
William Perez has worked as a tax professional since 2004. He earned the enrolled agent designation by passing a comprehensive examination on federal taxes and maintains his credential by taking continuing education classes.
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- child and dependent care tax credit
- earned income credit, and
- exclusion for dependent care benefits
How to Split the Child Tax Benefits
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The custodial parent is highly advised to execute Form 8332 to release his or her claim to the dependent's exemption. Other documents such as divorce decrees, separation agreements, and child custody agreements may not provide the same level of detail as Form 8332. It's advisable to always prepare Form 8332 when parents agree on splitting the tax benefits for a particular dependent.
Form 8332 must be given to the non-custodial parent, who will then attach this form to his or her tax return. The custodial parent should keep copies of the form as well.
Claiming the Tax Benefits for Higher Education
Only the parent who is claiming the child as a dependent would be eligible to claim the tax benefits for college and other post-secondary education. These tax breaks include the tuition and fees deduction. Hope credit, American Opportunity credit, and the Lifetime Learning credit. However, these tax deductions and credits are not available for people whose filing status is married filing separately. Additionally, these deductions and credits are subject to income phase-out limitations.
If neither of the parents can claim these tax breaks, they may want to forgo claiming their child as a dependent, thereby allowing the child to claim these tax breaks for herself.
Cautions when Splitting the Child-Related Tax Benefits
Two taxpayers should not attempt to claim the same dependent. This will trigger an automatic IRS audit of both tax returns.
The noncustodial parent should always attach Form 8332 to his or her tax return to claim the tax benefits related to the child. The IRS is aggressive in denying dependents and other child-related tax breaks when this form is missing.
Custodial parents can revoke their waiver. Noncustodial parents should carefully review each year whether they can claim a dependent.
This sharing of the child-related tax benefits is available only to taxpayers who are the child's parents. Splitting of the dependent's tax benefits is not available to other family members.
Who's the Custodial and Noncustodial Parents?
The custodial parent is the person who is eligible to claim the dependent. Usually, this is the parent with whom the child lives for more than half the year. If the child lives with both parents for more than half the year, then the custodial parent is determined using the tie-breaker tests for qualifying children .
The noncustodial parent is the other parent. In other words the parent who is not eligible to claim the dependent, unless the custodial parent waives his or her right to claim the dependent.
Source: Publication 504.