When getting a divorce, there are a multitude of tax issues that need be taken into consideration before making any long-term or permanent
decisions. If a couple has young children, their college education may be a distant thought when they are simply trying to plow through the current issues of determining alimony and how to divide up the marital assets. But when deciding who gets the dependency exemption for the children, don’t forget that the deduction for certain tax credits is linked to who gets the dependency exemption. This means that the dependency exemption may be worth a lot more than a $3700 deduction per child.
The Child Tax Credit can only be claimed by the parent who claims the dependent. If you have a child under the age of 17 at the end of the tax year, you may be entitled to up to $1000 per child (the credit is phased out at higher income levels). In order to claim the Lifetime Learning Credit or the Hope Scholarship Credit, you also must claim the child as your dependent. This credit could be worth thousands of dollars. Even if you are the parent who is paying the tuition or other qualified expenses, you will not be able to claim the credit for higher education expenses unless you claim the child as your dependent. The Dependent Care Credit, however, may be claimed by either parent that pays work-related childcare costs, regardless of who gets the dependency exemption.
The IRS rule is that the parent with primary custody gets the dependency exemption for the child. If the parents have shared custody with an equal number of overnights, the dependency exemption is given to the parent with the higher AGI. However, if both parties agree, they can specify in their consent order how the dependency exemptions will be claimed. Couples can split the number of children, alternate years for claiming the child(ren) or divide the exemptions in any manner that makes the most sense for them from a tax and financial standpoint. It would be wise to have your CPA or financial advisor do some tax planning that can show these tax implications before deciding on the final wording of your consent order. If future tax issues are not taken into consideration now, there may be thousands of dollars sacrificed down the road.