For the average parent considering shared custody, their concerns focus primarily on access. They want to get to see their kids on birthdays or ensure that they can attend basketball games.
If you don’t address all of the right terms, especially if you handle your parenting plan or custody arrangement outside of court, you and your ex might overlook a particularly important decision that could have legal and financial implications for both of you.
Specifically, if you don’t discuss tax issues and determine which parent can claim the children on their annual tax return, either or both of you might run afoul of the Internal Revenue Service (IRS) when filing your next income tax return.
Only one of you can claim the children on your tax return
Having children has certain tax advantages. You can claim your minor children on your tax return and reduce your taxable income significantly. Costs related to their education and healthcare might also be expenses that you can deduct when filing your tax return.
Only one of you can claim specific expenses, and only one of you can claim the children as your dependents on your tax return. The person who directly paid an expense will usually be the one who claims it, even if they pay it with child support funds. It is common for the parent with more parenting time to be the one who claims the children.
Some couples that try to evenly split parental responsibilities may alternate years for claiming the children on income tax returns. There are even some couples that have the parent with less parenting time but substantially higher income claim the children because doing so is a net positive financial move for the entire family. Regardless of what solution you arrive at, it is crucial that you address income tax matters when negotiating custody arrangements or when preparing to file your tax return.
What happens if both of you claim the children?
The IRS will likely flag one or both of your returns if both parents claim the same children for income tax purposes. In such a scenario, the parent who did not have the right to claim the children will likely face penalties. They may need to adjust their tax return and possibly pay interest on any amount due that was late because of the error.
Obviously, addressing income tax matters before they cause a problem for your family will be a better solution than trying to address them after they occur. Learning more about the tax implications of divorce can help you avoid an audit or worse, possible tax-related criminal charges.