Which Parent Can Claim the Federal Child Tax Credit Following Divorce?

Two of the potentially most contentious issues that can arise in a New Jersey marriage dissolution proceeding are those pertaining to the children and those associated with finances. There are instances in which matters about children and finances collide, including when it comes to addressing an issue like which parent can claim the federal child tax credit following a divorce. We discuss the matter of which parent is legally authorized to claim the federal child tax credit following a New Jersey divorce.

Understanding the Federal Child Tax Credit

The Child Tax Credit or CTC is a specific federal tax benefit that permits eligible parents to reduce their tax bill upwards to $2,000 per qualifying child. A qualifying child under the terms and provisions of the CTC is defined as follows:  

• Under the age of 17 at the end of the tax year  
• Claimed as a dependent on the specific parent’s tax return  
• Have lived with the specific parent for more than half the year, as a general rule
• Be a U.S. citizen, national, or resident alien 
• Since only one parent can claim the credit per child, divorced or separated parents must determine who has the right to do so, which is at the heart of our discussion today.  

IRS Rules for Claiming the Child Tax Credit After Divorce

The IRS follows specific rules to determine which parent can claim the child on their federal tax return following a divorce:  

Custodial vs. Non-Custodial Parent

Determining which parent legally is the custodial parent is a foundational consideration when it comes to claiming the CTC. In this regard, the parent with whom the child lived for the “greater number of nights” during the course of the tax year is deemed the custodial parent for the purposes of this tax credit. Conversely and by extension, the non-custodial parent is the parent who did not have the child for the majority of the year.  

The general rule is that the custodial parent is usually entitled to claim the child tax credit. There are some limited exceptions to the general rule but any such exception is contingent upon the custodial parent releasing the claim to the tax credit.  

Form 8332: Release of Claim to Exemption

Speaking of releasing the claim to the CTC, the custodial parent must execute IRS Form 8332. Once signed, Form 8332 must be attached to the non-custodial parent’s tax return. Again, the non-custodial parent can only claim the CTC if the custodial parent explicitly allows it via Form 8332.  

Special Rules for Divorced or Separated Parents

There are some specific rules for divorced or separated parents to be aware of when it comes to the child tax credit. Two primary rules are the tiebreaker rules and those governing a divorce decree versus IRS rules.

Tiebreaker Rules

If parents have equal custody, which in this situation is defined as “exactly 50/50,” the IRS uses tiebreaker rules to determine who can claim the child for tax return purposes and, hence, the CTC:  

• The parent with the higher adjusted gross income (AGI) gets the CTC  
• If adjusted gross income is the same, the parent who files first may get priority  

Divorce Decree Versus IRS Rules  

Some divorce agreements specify which parent can claim the child. You need to keep in mind that the IRS does not automatically follow what is delineated in divorce agreements. It’s important to be aware that if the non-custodial parent tries to claim the child without Form 8332, the IRS may reject the claim, even if the divorce decree allows it.  

Common Federal Child Tax Credit Mistakes to Avoid

Finally, there are some rather commonplace federal CTC mistakes you need to take care to avoid. First, and probably the one that occurs most regularly, is both parents claiming the same child on their tax returns and for CTC purposes. There are a trio of possible outcomes for this error:

• IRS rejects the second return filed  
• IRS audits both parents.  
• IRS requires repayment of improperly claimed credits 

Second, a common mistake is the failure to update existing tax agreements to reflect who legally has the right to claim the child or children. If custody changes mid-year, parents should update their tax agreements to reflect who has the lawful right to claim the child.  

Third, and as has been discussed, yet another misstep is assuming a divorce settlement agreement or even a court-issued divorce decree overrides IRS rules. As has been explicitly set forth previously, the IRS requires the filing of a duly executed Form 8332 for the non-custodial parent to claim the credit If you have questions concerning federal child tax credit and divorce, call the Law Offices of Peter Van Aulen at (201) 845-7400 for a free consultation.