Tax season is upon us once again. And, like tides following the moon, calls come flooding back in regarding the ability to claim a child for tax purposes. My responses differ this year, however, due to the passage of the Tax Cuts and Jobs Act. This Act (hereinafter “TCJA”) affects both married and divorced people when it comes to claiming children for tax purposes.
Exemption: A tax exemption directly reduces a person’s taxable income.
For instance, if Little Johnny is single, makes $40,000 a year, and has no children, he would pay the tax rate associated with that income, which is probably around 22%. In this scenario, Little Johnny would owe Uncle Sam almost $9,000 in taxes. But, if Little Johnny is single, makes $40,000 a year, and has a child for which he could claim an exemption, the exemption would reduce the amount on which the tax rate of 22% would apply. If the exemption were $4,050 (like it was in 2017) Little Johnny’s taxable income would be $35,950 and Little Johnny would save roughly $1,000 by utilizing the tax exemption.
Credit: A tax credit reduces a person’s tax liability.
This means after a particular person’s tax obligation is determined, his obligation is reduced, dollar for dollar, by the amount of the tax credit. For income earned in 2017, the tax credit was $1,000 per child (subject to phase out restrictions). Therefore, if Little Johnny had a tax obligation of $1,000, but was able to utilize a child tax credit, he would end up not owing to any tax at all.
In short, tax exemptions are applied to pre-tax income, which lowers a person’s tax liability; tax credits are applied to the tax obligation and reduce the obligation dollar for dollar.
Tax Cuts And Jobs Act
Well, forget everything you just learned about child tax exemptions because beginning January 1, 2019, they no longer exist thanks to the TCJA. Little Johnny will no longer be able to reduce his income by $4,050 and thus, will no longer be able to utilize the same to lower his tax liability.
The good news for some is the TCJA increased the amount of the child tax credit from $1,000 per child to $2,000 per child.
So, Who Can Claim The Child On Their Taxes?
In North Dakota, the Supreme Court has said that a district court has the authority to allocate tax dependency exemptions. Wigginton v. Wigginton, 2005 ND 31, ¶ 18, 692 N.W.2d 108. The Supreme Court added that when awarding tax exemptions to the parties, “it may be prudent to place the exemptions in the hands of the party who will most benefit,” but the district court is not required to do so. Illies v. Illies, 462 N.W.2d 878, 882 (N.D. 1990).
Notice that the Supreme Court discussed only tax exemptions and not tax credits. Although there are no cases on this topic yet, it is arguable that district courts do not have the authority to allocate tax dependency credits. However, the Supreme Court does have the authority to order a parent to execute “consent forms” like Form 8332. Fleck v. Fleck, 427 N.W.2d 355, 359 (N.D. 1988). Form 8332 grants one parent the right to claim the children for exemptions, and therefore the right to claim the child for the child tax credit (a person must be eligible to claim a child as an exemption in order to claim the child for the tax credit, even though the exemption no longer exists – confused yet?).
The IRS knows non-tax professionals like you and I want to be able to find the answers to these sorts of questions on our own and so they produce “publications” on topics like this regularly. That being said, because of the large number of changes made to the Internal Revenue Code (“IRC”) by the TCJA, the IRS has only been able to provide a short summary on this topic so far.
Ordinarily, a child must reside with a parent for more than half of the year to claim the child as an exemption (and therefore, for the child tax credit). However, an exception exists for divorced parents (IRS Publication 972 page 3). IRS Publication 972 references the Instructions for Form 1040, which state that a non-custodial parent can claim a child for the child tax credit if the custodial parent signs Form 8332. I would caution our readers that I am not a CPA, nor am I a tax lawyer. It is prudent to consult with a tax professional before either claiming a child or deciding not to claim a child on this year’s taxes.
If you want to discuss this or how it may affect your child support you can reach the Family Law Team at SW&L at 701-297-2890. Or you can email us using the contact form below.
The information contained in this article and on this website is for informational purposes only and not for the purpose of providing legal advice.