Dependent exemptions and credits are among the many tax issues that must be resolved between divorcing spouses. The IRS website implies that only one parent (typically the custodial parent) may claim “the dependency exemption, the child tax credit, the dependent care credit, the exclusion for dependent care benefits, head of household filing status, and the EITC.” The policy is understandable for benefits like the EITC (earned income tax credit), since the qualifying child would be associated with the address at which he or she lives for most of the year. Standard dependency exemptions, however, are not dependent on where the child lives, which is why the New Jersey courts allow them to be split between spouses with multiple children.
This might come as a surprise to custodial parents who had assumed that they would be receiving all the tax benefits associated with their children. The right for non-custodial parents to claim child tax exemptions was established in the case of Gwodz v. Gwodz, in which the father asked to claim both children on his taxes, along with other forms of financial relief. The family court judge ruled that each parent be allowed to claim one child -- a ruling which was upheld by the Appellate Division. Their rationale was that 1) under the current statutes, the family courts have the right to allocate federal tax exemptions between the parents; 2) allocating the exemptions in this manner positively affected the net available income that would go towards child support.
The latter point is absolutely critical to ensuring that judges are not splitting the exemptions arbitrarily. First and foremost, judges must ensure that the allocation would be in the best interests of the children. Furthermore, the allocation must make sense in terms of each parent's net income. It would generally be more fair, for example, to let a custodial parent claim all the children if he or she earns significantly less than paying parent. Another important consideration is that the child tax credit phases out at the income threshold of $110,000 for married joint returns, $75,000 for unmarried individual returns, and $55,000 for married individual returns. Thus, it would be pointless for high-net-worth individuals to fight for tax exemptions which would bring them no benefit whatsoever. Unfortunately, it's not uncommon for vindictive exes to demand these useless credits just to deprive the other person, who is probably in need of the extra funds. These are just some of the factors that the courts would examine in order to determine the fairness and practicality of splitting the child tax exemptions.
For more information on child tax credits, or any other questions about filing taxes after divorce, please speak with the family law attorneys of Villani & DeLuca, P.C. Our lawyers can also assist you with tax liability issues such as IRS innocent spouse relief, equitable relief and separation of liability relief. They will be happy to advise you of your rights and options during a free initial consultation.