The Tiebreaker Rule
The case sometimes arises where both parents try to claim the same child. When this occurs, the IRS looks at the parties' custody arrangement. The IRS gives the dependent exemption to the parent the child lived with for six months or more, which is almost always the custodial parent, not the parent paying support. Furthermore, the child support guidelines in some states take into account the expectation that the IRS will award the right to claim the child on her taxes to the custodial parent. As a result, child support in these states may be lower than it would otherwise be if the guidelines did not factor in the tax issue.
Your family court might order the dependent exemption to go to you as the non-custodial parent in a divorce decree or child custody and support order. In this case, the custodial parent will have to sign IRS Form 8332 so the parent paying support can claim the deduction. Even if your state's guidelines take the tax issue into account, a court could still give you the right to claim your child after considering the special circumstances of your particular case. If child support is based entirely on your income — as might happen if your ex-spouse is staying home with your child and not working — `a court might be inclined to grant you the child-related tax deductions in its order.
A custodial parent can waive the right to claim a child by voluntarily signing IRS Form 8332. Parties sometimes agree to share the right to claim the child in marital settlement agreements or consent orders in court. You and the other parent may agree to alternate years or a more complicated arrangement. Depending upon your incomes, it may be cheaper for you to claim the child on your taxes and pay the other parent what she would have gained by claiming the child on hers.
Credits v. Deductions
Tax credits and tax deductions are two different things. A deduction is the ability to lower your taxable income by an amount of money attributed to some deductible expense, such as medical expenses or college tuition. You are therefore taxed on less income than you actually earned. With a tax credit, on the other hand, you are treated as if you already paid a given amount in taxes. A tax credit is a dollar-for-dollar benefit, but a deduction is only worth the amount of the expense multiplied by your income tax rate. With child support, the distinction becomes important because not all tax credits are transferable. The right to claim the Earned Income Tax Credit for a child can't be waived.