Q: What is the real value of a dependency exemption for tax purposes, and what will I be giving up if I allow my ex-partner to claim my child who lives with me as a dependent?
A: Sometimes, parents who do not file a joint tax return share the dependency of a child. A custodial parent may release the dependency exemption to the non-custodial parent, a process letting the non-custodial parent claim the child on a tax return. The custodial parent releases the exemption claim using IRS Form 8332 for the current or future tax years. The custodial parent uses the same form to revoke the release.
There are significant financial consequences associated with releasing a dependency exemption, whether done by agreement or court order. Claiming a child as a dependency exemption affects taxable income, eligibility for the Child Tax Credit and Earned Income Tax Credit, and eligibility for the Child and Dependent Care Expenses credit.
First, let’s address taxable income. For 2015, each exemption will reduce taxable income by $4,000. A reduction in taxable income reduces tax liability. For taxpayers in the 10 percent tax bracket, losing the exemption costs them $400. If in the 15 or 25 percent tax brackets, the lost exemption costs them $600 or $1,000. Taxpayers in higher tax brackets lose even more money by releasing the dependency exemption.
Eligibility for the Child Tax Credit is based on custody and claiming the dependency exemption. If a custodial parent releases the dependency exemption for a child under 17, they give up the $1,000 Child Tax Credit. A non-custodial parent cannot claim the Child Tax Credit. The $1,000 credit is simply lost when the custodial parent releases the exemption.
The Earned Income Credit is available only if the child lived with the taxpayer for more than half the year. Even if a custodial parent releases the exemption to a non-custodial parent, the non-custodial parent is not eligible for the Earned Income Credit unless the child lived with that parent for more than half the year. The custodial parent can release the dependency exemption and still claim the Earned Income Credit.
Finally, a custodial parent can claim child and dependent care expenses on IRS Form 2441 even if the custodial parent releases the dependency exemption. The non-custodial parent cannot claim child care expenses.
The Kaiserslautern Legal Services Center will begin preparing 2015 tax returns in early February. Contact their office if you have questions about dependency exemptions or other tax issues, and take advantage of the military’s free tax preparation services for your federal and state income tax returns. It’s a valuable service; use it or lose it.
Editor’s note: This article is for general information only and does not constitute legal advice or create an attorney-client relationship. You should always consult an attorney for specific legal questions.