I got divorced in 2021. We have 2 minor children for which we share 50-50 custody. By Agreement, we will each claim 1 child every year. I plan to file Head of Household and claim 1 dependant for the Child Tax Credit, she will claim the other and do the same.
My question pertains to Dependant Care expenses. We pro rata expenses such as a daycare for both children. This means that I pay 60% of the expenses, she pays 40%.
Do I claim 60% of the child care costs for my 1 dependant or 100% of the expenses, even though I didn't pay 100%, since she won't be claiming that child? What of our second child? While I won't be claiming him as a dependant for CTC purposes, I did pay (pro rata) child care expenses so would I claim 60% of those costs of 0%?
Thank you in advance
You have a bigger issue.
For tax purposes, there is no such thing as joint custody, regardless of what your legal agreement says. The requirement, to be custodial parent, is that the child live with you MORE than 50% of the time. One of you has to be the custodial parent and the other the non-custodial parent. The IRS goes by physical custody, not legal custody*.
There is a special rule in the case of divorced & separated (including never married) parents. When the non-custodial parent is claiming the child as a dependent/exemption/child tax credit; the custodial parent is still allowed to claim the same child for Earned Income Credit, Head of Household filing status, and day care credit. This "splitting of the child" is not available to parents who lived together at any time during the last 6 months of the year; then only one of you can claim the child for any tax reasons. The tax benefits may not be split in any other manner.
Note in particular that the non-custodial parent can never claim the Earned Income Credit, Head of Household filing status or the day care credit, based on that child, even when the custodial parent has released the dependency to him.
So, it's good idea to let the other parent know that you will be claiming those items, as many first time divorced parents are not aware of this rule and may try to claim those items, which will cause the IRS to send out letters.
Ref: https://www.irs.gov/publications/p17#en_US_2017_publink1000170897
Scroll down to "Children of divorced or separated parents (or parents who live apart)"
So, the answer to your question is only the custodial parent may claim the dependent care credit. She may claim all the money paid, including the amount paid by the non custodial parent under the theory that his paying the expense is just another form of child support and it was her money that paid for it.
Yes, the IRS expects you to count the numbers of nights the child sleeps at each parent's home. It is allowed for you to arrange the children's schedules so that one child spends more than half the year with the father while the other spends more than half with the mother. Then you are each the custodial parent of one child and would claim the day care credit for that child, counting 100% of the money paid, by both parents.
*In the rare case (could probably only happen in a leap year like 2020), where the time that each parent has the child is exactly equal, then the parent with the higher income (AGI) is the custodial parent, for the purpose of determining who has first priority on claiming the child as a dependent. But then neither parent can claim a Qualifying Child dependent, for some tax benefits because neither parent had the child the required MORE than half the year. (no earned income credit, or dependent care credit,based on that child, and the child would not qualify the parent for Head of Household filing status).
Thank you for the very thorough reply.
I'm familiar with Publication 503 and the sensitivity around custodial parents and number of nights the child was with you.
My situation is even more unique at least for the 2021 tax year in that the ex and I actually lived together, with both kids, from January through the end of March, then we commenced a 50-50 custody arrangement. That being said, we can both technically claim to be custodial parents for both kids since we lived apart for more than 6 months but also had more than 50% of the nights with each child. I have the higher AGI so, abent our Agreement, I would be considered the custodial parent for both kids.
That aside, what I'm taking away is that for 2021, and future tax years, we should exchange 8332's for the respective children and claim 100% of the child care expenses for our respectively claimed child and 0% for the other. We should also be sure to arrange the schedule in such a way that in 2022 and beyond the child we plan to claim as a dependant sleeps at our respective homes for at least 183 nights as to avoid confusion over who the custodial parent actually is.
Do I understand correctly?
Thank you again.
For 2021, if each parent had physical custody in their home for at least 183 nights, then no form 8332 can be used. That rule does not apply to you for 2021. You simply agree with one another as to which parent will claim which child. If you can’t agree, the IRS tiebreaker is whichever parent had custody the greater number of nights. In the unlikely event that you each had custody exactly the same number of nights, the second tiebreaker is which ever parent has the larger income. You may only claim the dependent care credit for the child that you claim as a dependent. The concept of “splitting“ the tax benefits of the child does not apply to you in 2021.
For 2022 and into the future, the only parent with the automatic right to claim a child as a dependent is the parent where the child lived more than half the nights of the year. The noncustodial parent can’t issue a valid form 8332. You can’t each have custody exactly half the nights unless it is a leap year and you arrange the timing perfectly, and if that did happen, no one can claim head of household or the dependent care credit because exactly half is not more than half, and the parent with the larger income gets to claim the children as dependents for purposes of the child tax credit.
If one parent has custody of both children for more than half the nights, then only that parent can claim the dependent care credit or head of household status. That parent could transfer the child tax credit to the other parent using form 8332 but that is the only thing that can be transferred.
If you actually arrange physical custody so that one parent has custody of child A for 183 or more nights and the other parent has custody of child B for 183 or more nights, then the custodial parent of child A can claim child A as a dependent without needing form 8332, and can claim head of household status and the dependent care credit using child A as the qualifying child. The other parent can claim child B as a dependent without needing form 8332, and can claim head of household status and dependent care credit using child B as a qualifying person.
Form 8332 is only needed to allow the noncustodial parent to claim the child tax credit. If you actually arrange physical custody so that each parent has custody of one child for at least 183 nights, then each parent is the custodial parent for that child (under IRS terminology for “custodial parent”).
Yeah, I went back and re-read publication 504 and started to think that form 8332 didn't actually apply. Thank you for the clarification.
Both responses here have been incredibly helpful. I'll discuss with the ex and ensure we file properly this year and plan accordingly for subsequent years.
Thank you so much! Divorce makes certain things, like taxes, much more complicated.
I want to put a word of caution into your ear, realizing that I know nothing about you or your former spouse.
If you are going to arrange actual physical custody of your children over the next decade or so, so that each parent has custody more than half the year of one of the children, make sure you document this in writing or other reliable records, like a marked calendar and save all of your text messages about custody and transfers. In the future, there is always a possibility that your ex (or their new spouse) will become dissatisfied with the arrangement and will try to claim both children as dependents to get whatever tax credits or stimulus payments or other benefits the government is handing out that year. If both parents claim the same child as a dependent, the IRS will send letters to both parents asking them to provide proof of where the children actually lived. If you are caught flat-footed without proof, you may lose the case even though everything had been working as arranged up to that point. And a particularly vindictive former spouse could file amended tax returns going back three years to try and change the arrangement.
While this is surely a worst case scenario, you may want to consider compiling a dossier that you would save with your other important tax papers for at least three years.
Good luck.