There are multiple tax benefits associated with parenting including the minor child tax dependency exemption (dependency exemption), the child tax credit, head of household status, child and dependent care tax credit, the earned income tax credit, and benefits associated with Health Savings Accounts.
When the parents of a child are together and filing taxes jointly, the parties do not have to think about who is entitled to the tax benefits of claiming the minor child or children. However, when couples divorce, who claims the child or children for tax proposes can become a source of contention.
Which benefit is up for grab?
The allocation of each of the above mentioned benefits is controlled by the regulations of the internal revenue service. Minnesota courts cannot allocate the majority of these benefits - the single tax benefit that Minnesota courts can allocate is the dependency exemption. All other benefits will be allocated via tax law.
Absent a controlling child support order, the IRS will allocate the child tax exemption to the “custodial parent”. The custodial parent is the parent that has the majority of parenting time with the minor child. This is calculated based on overnights. Even in situations of joint physical custody, in which both parents enjoy equal parenting time, because there are usually an odd number of nights in a year, one parent will be the custodial parent with the majority of the overnights. The parent with the majority of overnights will be classified as the custodial parent and will be awarded the child tax exemption. If the child spends an equal number of nights with both parents, the custodial parent is the parent with the higher adjusted gross income.
Despite the default mentioned above, parties are able to stipulate to an allocation of the dependency exemption. One common way parties often chose to share the exemption is by alternating years that they claim the child for tax purposes. If the parties agree to alternate or otherwise share the minor child tax exemption, the party that would be entitled to the dependency exemption must execute IRS Form 8332 to allow the non-custodial parent to claim the benefit to the other parent.
If the parties involved in a dissolution proceeding do not agree to the default allocation of the parent with physical custody claiming the benefit and do not agree to share the tax benefit (this often occurs in a situation in which the non-custodial parent is paying a high amount of child support) the decision can be made by the court. The court will decide how to allocate the child dependency exemption based on Minn. Stat. §518A.38.7 which directs the court to consider the financial resources of each party, if a parent is able to provide for a child even if not awarded the dependency exemption, if both parties are eligible to claim the benefit, and if the award of the tax emption impacts a parties’ ability to claim a premium tax credit.
Despite the court’s ability to decide to whom to allocate the dependency exemption, they may condition an award of dependency exemption upon payment of child support. Additionally, a party with less than ten percent parenting time is only able to claim the dependency exemption by agreement of the parties.
Enforcing the award:
It is important to note that the allocation of the tax dependency exemption, in a judgment and decree, is only binding in Minnesota State Courts. If both parents file their taxes and both claim the minor child, then the IRS will apply its own set of rules for deciding who will receive the tax dependency exemption. These tiebreaker rules consider which parent had physical custody of the minor child for more time during the past year. If the parents had equal time with the minor child, the IRS will consider which parent had a higher adjusted gross income.
If a benefit is allocated between a former husband and wife in a judgment and decree, and one of the parties claims a benefit when they should not, the parties can return to Minnesota Family Court to address the situation. In this example, according to newly minted Minn. Stat §518A.37.7, the father can bring an action asking for monetary compensation for the loss of a benefit on his taxes. He can also ask for an award of attorney’s fees if the mother claimed the child when it was not her year according to the Judgment Decree or failed to execute the necessary paperwork to release the exemption. Importantly, the wronged party must bring their motion within three years. Any party that wrongfully brings a motion under this statute may be ordered to pay the other party’s attorney’s fees.
If you have questions about claiming your minor children on your taxes or if you ex wrongfully claimed your joint child on their taxes, it is important to speak to a legal professional. The attorneys at WLG can make sure you receive the tax benefits to which you are entitled!