Generally, the tax dependency exemption is awarded to the custodial parent; this is the federal default[1]. The custodial parent is defined as the parent receiving more than 50% of the parenting time, based on overnights. However, Minnesota Courts have the power to award a tax exemption to a non-custodial parent incident to the determination of child support and physical custody. Minn. Stat. § 518A.38, subd. 7. In making the decision, Courts are directed to consider: 1) the financial resources of each party; 2) if not awarding the dependency exemption negatively impacts a parent’s ability to provide for the needs of the child; 3) if only one of both of the parents would receive a tax benefit from the dependency exemption; and, 4) the impact on the parent’s ability to claim premium tax credits.

Factors one and two, the financial resources of the parties and the impact of the dependency exemption on a party’s ability to care for the child, will vary by case. However, regardless of whether they claim the tax dependency exemption, a host benefits are availed to only the custodial parent. For example, only the custodial parent can claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, and the earned income credit. [2]

The third factor, determining who would benefit most from the exemption, is also fact specific. However, there are changes under the Tax Cut and Job Act that should be kept in mind. The monetary value of the child dependency exemption found in has been reduced to zero under the 2018’s Tax Cut and Job Act (TCJA). This means that the federal child dependency exemption is now worth $0.[3] While the exemption’s monetary worth has been negated, the value of the exemption is that the child tax credit always follows the exemption. The child tax credit remains in effect but has been modified by TCJA.  The maximum tax credit has been changed from $1,000 per child per year to $2,000 per child per year.[4] The child tax credit was further amended by TCJA so that the full tax credit of $2,000 will apply to a negative balance. If there is a tax credit, the government will pay up to $1,400 per child.[5] In summary, the maximum that either parent stands to gain is either a credit of $2,000 applied to a negative balance or a refund of $1,400 under the current tax scheme.

Whether the award of the exemption would influence a parent's ability to claim premium tax credits is also a consideration.  According to the Affordable Care Act, to claim a premium care tax credit, a parent must not be eligible for employee sponsored insurance or governmental programs such as Medicare or Medical Assistance.[6] To receive the premium tax credit, the individual must purchase health insurance on the Health Insurance Exchange/Marketplace. Finally, the parent claiming the tax dependency exemption for the year is the parent eligible to receive a premium tax credit for the eligible health insurance of the joint minor child. [7]

Under Minnesota Law, the Court may issue an order modifying the award of the tax dependency exemption upon a showing of substantial change in the factors outlined above. If you have questions about the tax dependency exemption and if you can claim your children under the current tax laws, don’t hesitate to contact the knowledgably professionals at Wilson Law Group.

[1] 26 U.S.C. § 152(e)(1). 
[2]  U.S. Department of Treasury. Internal Revenue Service. (2017). Publication 504: Divorced or Separated Individuals (Cat. No. 15006I) Retrieved from https://www.irs.gov/pub/irs-pdf/p504.pdf. (see Applying the tiebreaker rules to divorced or separated parents, page 12).
[3] Tax Cut and Job Act of 2017, Pub. L. No. 115–97. (131 Stat. 2054) at Sec. 11041
[4] Pub. L. No. 115–97 SEC. 11022. (h)(2).
[5] Pub. L. No. 115–97 SEC. 11022 (h)(5)(A).
[6] U.S. Department of the Treasury. Internal Revenue Service. (2016) Publication 5187: Affordable Care Act: What You and Your Family Need to Know (Cat. No. 67349C). Retrieved from https://www.irs.gov/pub/irs-pdf/p5187.pdf, at pg. 11. See also mn.gov, Health Insurance Premium Subsidy, https://mn.gov/mmb/minnesota-health-insurance-premium-relief/(last visited Nov. 7, 2018). 
 
[7] U.S. Department of the Treasury. Internal Revenue Service. (2016) Publication 5187: Affordable Care Act: What You and Your Family Need to Know (Cat. No. 67349C). Retrieved from https://www.irs.gov/pub/irs-pdf/p5187.pdf, at pg. 12 and 19.