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Tax Credits Related to Children

In addition to the tax exemption for minor children, there are several tax credits to consider when negotiating a divorce settlement for your client. Some credits are tied to which parent is entitled to the tax exemption, and some are not. Therefore, it is important to know the requirements for all exemptions and credits before advising your client.
Child Tax Credit
As with the child tax exemption, the child tax credit generally goes to the custodial parent (for IRS purposes, this means the parent with whom the child physically lived the majority of time during the tax year). However, like the exemption, the noncustodial parent is entitled to claim the child credit if the custodial parent signs a written declaration, such as IRS Form 8332 (recommended), stating that the custodial parent will not claim the child as a dependent for the year (or for all years specifically stated). The noncustodial parent must attach the written declaration to the tax return for each year that it is claimed. Alternatively, if no IRS Form 8332 has been prepared, the noncustodial parent may attach the applicable pages from the divorce decree or separation agreement, including the cover page, the pages that include the specific terms, and the signature page. However, the decree or agreement must specifically state: (1) the noncustodial parent can claim the child, without regard to any conditions, such as payment of child support; (2) the custodial parent will not claim the child as a dependent for the specified year or years; and (3) the specific years during which the noncustodial parent rather than the custodial parent may claim the child as a dependent.
Additional Child Tax Credit
Some individuals who get less than the full amount of the child tax credit may be able to claim the additional child tax credit. As with the child tax credit, the custodial parent is presumed to be entitled to any available additional child tax credit. To be eligible, the noncustodial parent must meet all of the requirements stated above for the child tax credit and the exemption.
Earned Income Credit
Many low-to-moderate income households may be entitled to claim the earned income credit. The earned income credit, unlike the child tax credit and the exemption, can ONLY be claimed by the custodial parent. The noncustodial parent is never permitted to take the earned income credit. If the custody situation changes such that the child actually resides with the noncustodial parent for more than half of the year, the noncustodial parent needs to obtain custody of the child.
Hope Credit and Lifetime Learning Credit
The Hope Credit and the Lifetime Learning Credit are available for eligible higher education expenses, such as tuition and fees, at an eligible educational institution, such as a college, university, vocational school, or other postsecondary educational institution. These credits are only available to the parent who is eligible to claim the child as a dependent. Therefore, there is a presumption that the custodial parent is entitled to the credits unless the noncustodial parent provides the required documentation to claim the child as an exemption, as explained above. This is true no matter how much financial support is provided by each parent. Therefore, when preparing divorce or separation agreements, it is important to consider the payment of future college expenses, no matter how young the children are at the time of the divorce or separation.
Tuition and Fees Deduction
The tuition and fees deduction is not a tax credit. However, sometimes it is more advantageous for claiming higher education expenses than the Hope Credit or the Lifetime Learning Credit. As with the credits, the parent claiming the child exemption is entitled to the deduction.
You probably never thought that you would need to know so much about tax laws in your family law practice. However, a basic understanding of the tax laws is crucial to drafting a divorce decree or separation agreement that is advantageous to your client. It can also be a negotiation tool to convince a noncustodial spouse with a far higher income than a custodial spouse to pay more child support and/or to pay the child’s college expenses in exchange for some more favorable tax treatment. When in doubt, the IRS has many helpful (and free!) publications to guide you. And, as always, you can always consult with a tax attorney, an accountant, or a professional tax preparer.
Your Federal Income Tax for Individuals (2007) (IRS Pub. 17)
Child Tax Credit (2007) (IRS Pub. 972)