The custodial parent qualifies for Head of Household filing status, Earned Income Credit, and Child and Dependent Care Credit (if eligible) for both children. Each parent qualifies for Child Tax Credit only for the child they are claiming.
For tax purposes, custodial parent vs noncustodial parent is determined by physical custody — not legal custody. Regardless of what the divorce decree states, the return has to be filed based on tax law.
You mentioned that the children lived with this taxpayer for eight months in 2024. If she and the children lived with her ex-spouse in 2024, it's possible that they could have also lived with the ex for more than eight months. You'd need to know if this taxpayer had physical custody for longer than the other parent to decide if she qualifies to claim Head of Household filing status, regardless of the divorce decree.
If she does qualify as the custodial parent, she won't lose the Earned Income Credit for the child that she's not claiming. The second child would be considered a nondependent that's eligible for Earned Income Credit.
