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Divorced, Never Married and Non-traditional Families and Tax Credits

Authored By: Iowa Legal Aid LSC Funded
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An important part of figuring income taxes is claiming dependency exemptions and credits. You can claim a dependency exemption for a "qualifying child" or a "qualifying relative." The rules on claiming dependents can be complicated, especially in families where parents are divorced, never married or when many generations of one family live together. Fortunately, free help is available for low-income taxpayers at Volunteer Income Tax Assistance (VITA) sites or Tax Counseling for the Elderly (TCE) sites in Iowa.

The definitions of qualifying child and qualifying relative impact who can claim children or other relatives as dependents - and who cannot. Each dependency exemption lowers a taxpayer's taxable income by $3,650. Some very low-income taxpayers may not benefit from the dependency exemption itself. Where the taxpayer may benefit is from the refundable credit such as the Earned Income Credit. In most cases, you must be able to claim the dependency exemption in order to claim many of the child-oriented credits. There are exceptions for divorced parents, never married parents or separated parents. Non-custodial parents may be able to claim the dependency exemptions and child tax credit, while the custodial parent may be able to claim the Child Dependent Credit and Earned Income Credit and Head of Household filing status.

To make it easier to see what situations may come up, here are three examples. These examples involve three kinds of tax credits:

  • The Earned Income Credit.
    How Much Can I Get from the Earned Income Credit or other credits?
  • Families with one child who earn less than $35,353 in 2010 (or less than $40,545 for married filing jointly status) are eligible for a credit of up to $3,050.
  • Families with two children who earn less than $40,363 in 2010 (or less than $45,373 for married filing jointly status) are eligible for a credit of up to $5,036.
  • Families with three or more children who earn less than $45,373 in 2010 (or less than $48,362 for married filing jointly status) are eligible for a credit of up to $5,666.
  • Workers without a qualifying child who earn less than $13,460 in 2010 (or less than $18,470 for married filing jointly status) are eligible for a credit of up to $457.
  • Investment Income Limit = $3,100.

Qualifying children are sons/daughters, sisters/brothers, stepchildren and siblings, grandchildren and adopted children as long as they lived with you for more than six months in 2010. Foster children who are placed with you more than six months of the year by an authorized government or private placement agency also qualify.

The child(ren) must be:
  • Under age 19, or under age 24 if they are full-time students, or;
  • Totally and permanently disabled child(ren) of any age also qualify, and;
  • Your qualifying child must be younger than you unless totally and permanently disabled, and;
  • If both you and the parents of the child can claim the same qualifying child, you can not claim him/her unless your Adjusted Gross Income (AGI) is higher than that of the parent with the highest AGI.
  • All qualifying children need to have a social security number valid for employment.
  • The Child Tax Credit. The child tax credit is for children under age 17 who live with a taxpayer for more than half of the tax year. The Child Tax Credit can be up to $1,000 per child. If the credit exceeds the amount of tax owed, a part of the credit may be refundable and is called the additional child tax credit if the taxpayer earned more than $3,000; and
  • The Dependent Care Tax Credit. This tax credit helps families who qualify use their child care costs to reduce their taxable income. Depending on their income, this credit can be between 20 percent and 35 percent of the first $3,000 in child care costs for one child. For two or more children, it can apply to 20-35 percent of the first $6,000 in child care costs. For instance, a worker who earns $25,000 and spends $3,000 on her one child can get a $900 credit or 30% of the $3,000 she spent in child care. The child has to be under the age of 13 when the expenses were incurred. Cost paid for care of a qualifying person such as a dependent or spouse who is either physically or mentally incapable of self-care may be qualified expense for this credit.
Example 1: Unmarried Couple, Harry and Sally

Harry and Sally live together with Sally's daughter, Amy. Harry supports Sally and Amy and pays all the household expenses. Sally stays home with Amy and has no income. Because Harry supports both Sally and Amy, Harry can claim them each as "qualifying relatives."If Sally had income and a filing obligation, Harry would not be able to claim Amy as she would be considered Sally's qualifying child. A qualifying child can not also be a qualifying relative of someone else.

  • Harry will have to file Single. He can not file Head of Household because neither Sally nor Amy meets the relationship test for head of household.

  • Harry can claim Sally and Amy as dependents.

  • Sally had no income so she will not file a return.

Example 2: Father, Son and three grandchildren

George, lives with his son, Alan, and his grandchildren, Jack, Jill and Jason. George earns $20,000 and Alan earns $12,000. George and Alan both help pay for household expenses. George contributes more than half the cost of maintaining the home.

If Alan takes the Earned Income Credit for any of his children, he will also have to take the dependency exemption for that child. The child tax credit also goes to the person claiming the exemption for the child in question. If Alan elects not to claim both of his children, George qualifies to claim that child's exemption and child-related tax credits because George's AGI is higher than Alan's.

TIP: It is best if George and Alan agree how to file. George will likely qualify as head of household so long as he uses one of the children as a dependent. Alan could file single and claim one or two dependents and one or two children for the Earned Income Credit. This family shares expenses, so they should try to file taxes to make the most of the dependency exemptions and the Earned Income Credit. If the family disagrees and both use the same dependents for the Earned Income Credit, the IRS will give the Earned Income Credit and the Dependency Exemptions to Alan.

Option 1. If George claims Head of Household, 2 dependents and Alan claims single and one dependent, George will receive a federal refund of $8,617 and Alan will receive a refund of $5,560. Their federal refunds combined would be $14,267.

Option 2. If George claims Head of Household, 1 dependent and Alan claims single and two dependents, George will receive a refund of $5,446 and Alan will receive a refund of $7,760. Their federal refunds combined would be $13,206.

The household will have an additional $1,061 if they file using Option 1.
 

Example 3: A Divorced Couple, Harold and Nancy

Harold and Nancy got divorced in 2004. Neither Harold nor Nancy has remarried. They have three children. The children lived with Nancy for all of 2010. Harold had visitation. The divorce decree tells Harold he gets to take the children as dependency exemptions if he is current in child support. Harold is current. Harold will need a signed release from Nancy to be able to claim the children as dependent. A copy of the court order is not sufficient. The IRS has a form 8332 taxpayers can use.

  • Harold can file Single. He can claim the dependency exemptions and the child tax credit for all three children.

  • Nancy, if otherwise qualified, can take the Earned Income Tax Credit and the Child Dependent Credit. Nancy should also be able to file head of household. This is an exception to the general rule that the person with the dependency exemption gets all the credits if they meet all of the qualifications.

Each individual taxpayer's situation is different. These are meant only as examples of how taxpayers may often be better off if they discuss how to get the most out of available tax benefits. If the taxpayers don't discuss or can't agree, the IRS will assign the benefit and it may not be nearly as beneficial.

The information included in this article is not intended or written to be used and cannot be used to avoid penalties under the Internal Revenue Code.

Last Review 6/6/11

Last Review and Update: Jun 06, 2011
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