With the new Tax Cuts and Jobs Act of 2017 (TCJA), Congress made significant changes to dependency exemptions and child tax credits that will matter a lot to divorcing parents. The key takeaway: the Child Tax Credit follows whoever has the dependency exemption – so it still matters how the dependency exemption is allocated in divorce agreements. Further, to those who say that the TCJA eliminated the dependency exemption — this is not true. It has been reduced to zero through 2025 but it has not been eliminated.
A little background first. The dependency exemption was $4,050 per “qualifying child” in 2017 – which meant that, to someone with a 35% effective tax rate, it was worth about $1,400. It was available to most taxpayers as it only began to phase out for single filers at adjusted gross incomes of $261,500.
Subject to a multiplicity of factors beyond the scope here, the “qualifying child” was one who reached the age of emancipation according to the state in which the child is domiciled. This varies from state to state – in Massachusetts, it is typically twenty-three.
The primary custodial parent is entitled to claim the dependency exemption unless the parent agrees to release the exemption to the other parent by completing and filing with the IRS Form 8332. Divorce agreements typically contain a provision as to how the dependency exemption is allocated.
The Child Tax Credit, as noted above, attached to whoever had the dependency exemption – and the TCJA doesn’t change this. However, until TCJA, the Child Tax Credit ($1,000 per child in 2017) began to phase out for single filers at adjusted gross incomes of $75,000 – so many divorce lawyers who deal with higher net worth clients never really confronted it.
The TCJA made the Child Tax Credit more valuable, doubling it to $2,000 per “qualifying child” and making it available to most taxpayers – it only begins to phase out for single filers at adjusted gross incomes of $200,000. And, as always, unlike the dependency exemption, it’s a credit – that is, it applies dollar for dollar against any taxes owed. Even better, it’s a refundable credit up to $1,400 per child. This means that, if the amount of the credit is larger than the tax owed, the taxpayer gets a cash refund for the difference (up to $1,400).
As with the dependency exemption, there are a host of factors beyond the scope here that define the “qualifying child.” For the most part, however, to be eligible for the Child Tax Credit such a child must be under seventeen years old as of December 31 of the tax year in order for the Child Tax Credit to apply.
The bottom line: if you’re going through a divorce, make sure you and/or your lawyer have a good handle on how the new tax law has impacted this area. You don’t want to leave valuable dollars on the table.