ARTICLE 3: NEW TAX LAW: IMPACT OF THE CHILD TAX CREDIT AND DEPENDENCY EXEMPTION UNDER THE NEW LAW
Previously, in divorce proceedings, the question of which parent would claim the children for tax purposes had been a contested issue. The reason – the exemption was financially beneficial for the parent that received it. For example, the dependency exemption for a “qualifying child” in 2017 was $4,050, which equated to a significant exemption for the recipient. Typically, the parent who was the primary custodian was entitled to claim the exemption unless the parents agreed otherwise, or the court allocated the exemption to the non-custodial parent. The transfer to the non-custodial parent was accomplished by the custodial parent releasing the exemption to the other parent by completing IRS Form 8332. In addition, the Child Tax Credit for the dependent child flowed to whomever had the dependency exemption. The Credit in 2017 was $1,000 per child.
With the passage of the Tax Cuts and Jobs Act of 2017 (“TCJA”), the value of the dependency credit was reduced to zero. This has prompted many people to believe that the dependency exemption is no longer an issue to be dealt with in a divorce proceeding. The Child Tax Credit, as stated above, however, still attaches to the parent that has the dependency exemption, and the TCJA has made the Child Tax Credit even more valuable than in the past, doubling it to $2,000 per “qualifying child” and making it available to most taxpayers with limited phaseout provisions.
It should be noted that the Child Tax Credit, unlike the dependency exemption, is just that, a credit which means that it is a dollar-for-dollar reduction against any potential taxes owed. The taxpayer should further be aware that the Credit is a refundable credit of up to $1,400 per child. This means that if the amount of the credit is larger than the tax owed, then the taxpayer gets a cash refund for the difference (up to $1,400).
The take away from this blog is that if you are going through a divorce proceeding, it is important to make sure that the attorney you have representing you understands the new tax law and its potential impact on your divorce proceeding. Should you require additional information on this topic, please feel free to contact Simpson Legal Group, LLC at (712) 256-9899