An important part of a divorce agreement relates to the division of the tax deductions for the children of the divorce. Determining the allocation of the deductions can have a significant impact on the financial interests of the parties after the divorce. There are several ways to divide up the child deductions in a divorce, each with its own pros and cons.
Common Divisions of the Deductions
In many cases, divorcing parents divide up the tax deductions in practical terms irrespective of the financial aspects of the case. For example, if there are two children, it is not uncommon for each parent to take one deduction. If there is only one child, the parties frequently rotate the deduction yearly. If there is an odd number of children, the parties oftentimes will rotate, each claiming two children one year and one child the following year.
Sometimes divorcing parents will divide the child tax deductions based upon economic factors. For example, a parent in a higher tax bracket may benefit more from the tax deduction whereas a stay-at-home caregiver with minimal earned income may not benefit at all from the deduction. Also, a parent in the highest tax bracket may not benefit nearly as much as a parent in a middle tax bracket. For this reason, the division of the tax deductions in a divorce can sometimes be done based upon each parent's income.
The IRS Tiebreaker Rule
If parents are unable to reach an agreement with respect to the tax deductions, the IRS has instructions to determine which parent can claim the deduction. These are known as the tiebreaker rules. For example, if a child lives with one parent for seven months out of the year and the other parent for five months, the parent with whom the child lived longer gets to claim the deduction. For equal parenting time, the parent with a higher adjusted gross income can claim the deduction. It is important to note that a couple's divorce agreement can override the IRS tiebreaker rules. If that is the case, the couple must file Form 8332 with their tax returns.
It is important that divorcing parents fully understand the tax implications of their agreement, including the effect of the child tax deduction. For that reason, it is highly recommended that parties seek out the advice or services of a tax attorney or an accountant prior to entering into any agreement. It can be rather difficult to modify a divorce agreement years later; therefore, it is best to be fully informed sooner rather than later to avoid potential problems later in life.