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Untangling child-related tax exemption questions after divorce

Tax season is fast approaching and with it can come the headache of tax-related questions after a divorce. Fortunately, being aware of eligible credits concerning child-related tax exemptions prior to filing taxes can help the process run smoother for Texas residents. After a divorce is finalized, tax benefits depend on whether the parent is custodial or noncustodial.

If the parent is noncustodial, there may be potential for large tax savings. If several requirements are met, the parent may have the right to claim their child on their taxes. Parents are required to either be divorced, separated via a written agreement or living apart for the last six months of the tax year. The child’s yearly support is required to have been provided by one or both of the parents and the child is required to be in the custody of one or both of the parents for over six months in the year.

In most cases, the custodial parent will receive the dependent exemption benefit. In order for a noncustodial parent to claim the dependent exemption, the custodial parent should sign IRS Form 8332. This releases the right for a noncustodial parent to claim the designated child for that particular tax year. Doing so renders the custodial parent ineligible for the claim that year and allows the noncustodial parent the opportunity to claim several other exemptions and credits including the dependency exemption deduction, totaling $3,700 for 2011 and the child tax credit worth up to $1,000 per eligible child.

Both parents, regardless of custody, are eligible to claim itemized deductions for children’s medical expenses paid out of pocket. Health savings account distributions and employer provided healthcare benefits can also usually be claimed, but the exemptions must meet certain qualifications.

The custodial parent also has several eligible tax breaks for which only they qualify. A couple items that can be claimed during tax time include Head of Household status and the child care tax credit. The only time noncustodial parents are authorized to claim this exemption is if they meet applicable tax law requirements.

Open communication during and after divorce can smooth the process of tax-time for Texas parents. Both have the ability to claim some exemptions or credits regardless of their custodial status. However, knowing that tax regulations are inherently complex, it is important to review all the relevant documents and rules prior to filing a tax return.

Source: Smart Money, “Child-Related Tax Breaks After Divorce,” Bill Bischoff, March 28, 2012

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