In the case of a divorce, separation or even unmarried parents, the issue of who claims any children involved for tax purposes is sure to come up. The Internal Revenue Service generally allows only one person to claim a child as a “qualifying child” for the purposes of dependency exemptions, head of household filing status, the child tax credit, the dependent care credit and the earned income tax credit. The same rules apply in the State of Michigan for the purposes of claiming an exemption against state income taxes. If the parties are married and filing a joint return, then all of the couple’s qualifying children apply against the income on the same return. But what does the single filer do? Does the mother always get to claim?
In the case of divorce, the tax exemption issue in Michigan often becomes part of the judgment. Per usual, the party who has primary physical custody of the children is often the party awarded the tax exemptions for those children (whether it is the mother or the father). If the parents are awarded joint physical custody, then the court will often order the tax exemptions to alternate between the parents (e.g. one parent claims the children on odd-numbered years, the other claims the children on even-numbered years). The Michigan Court of Appeals has held that trial court have the general authority to award the federal income tax dependency exemption for the minor children to either party. Fear v Rogers, 207 Mich App 642, 645; 526 NW2d 197 (1994). Additionally, the appellate court held that the income tax dependency exemption allocation should generally be considered part of the child support award, not the property settlement award, and is therefore subject to modification. Id at 646. However, this classification is merely a presumption and the parties and court may agree that the tax dependency exemption should be treated as a property settlement award under the circumstances which would make it unmodifiable. Id at 646. If treated as part of a child support award, the court can modify it upon a showing of proper cause of change of circumstances such as the non-custodial parent acquiring more overnights than the custodial parent. Clarke v Clarke, 297 Mich App 172; 823 NW2d 318 (2012).
Even if a Michigan court order allocates the ability to claim the child to a noncustodial parent, the noncustodial parent must comply with the Internal Revenue Code when taking the exemption. Federal law still supersedes state law. Even though one parent may file a motion for a finding of contempt against the other parent in the Michigan family court for claiming exemptions in violation of the divorce decree, the IRS has the last word on whether the exemption is allowed. An audit or disallowance will certainly be triggered if both parents attempt to claim the same child’s social security number. Taxpayers must be aware of the following rules:
- Your child must be a “qualifying child” as defined in 26 U.S.C. §152(c) to claim as a dependent, which includes ALL OF THE FOLLOWING:
- The child was the taxpayer’s child or other descendant, or the child was the taxpayer’s sibling, stepsibling or a descendant of the sibling or stepsibling. 26 U.S.C. §152(c)(2).
- The child is under age 19 at the end of the tax year (under age 24 if a full-time college student, or any age if permanently and totally disabled). 26 U.S.C. §152(c)(3).
- The child lived with the taxpayer for more than half of the year. 26 U.S.C. §152(c)(1)(B).
- The child has not provided more than half of his or her own support during the tax year. 26 U.S.C. §152(c)(1)(D).
- The child has not filed a joint return with a spouse. 26 U.S.C. §152(c)(1)(E).
- However, the child can be treated as the “qualifying child” of the non-custodial parent if ALL OF THE FOLLOWING CONDITIONS ARE MET:
- The child receives over one-half of the child’s support during the calendar year from the child’s parents who are divorced or legally separated under a decree of divorce or separate maintenance, or who are separated under a written separation agreement, or who live apart at all times during the last 6 months of the calendar year. 26 U.S.C. §152(e)(1)(A).
- The child is in the custody of 1 or both of the child’s parents for more than one-half of the calendar year. 26 U.S.C. §152(e)(1)(B).
- The custodial parent signs a written declaration (e.g. fills out and signs Form 8332) that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year. 26 U.S.C. §152(e)(2)(A).
- The noncustodial parent attaches such written declaration (Form 8832) to the noncustodial parent’s return for the taxable year beginning during such calendar year. 26 U.S.C. §152(e)(2)(B).
- In the event that the rules for divorced or legally separated parents do not apply (e.g. parents filing married but separate), the Internal Revenue Code provides the following “tiebreaker rules” for deciding who gets to claim the qualifying child IN THE FOLLOWING ORDER:
- The parents if filing a joint tax return together. 26 U.S.C. §152(c)(4)(A).
- If more than one parent claiming the child, then the parent with whom the child resided for the longest period during the year. 26 U.S.C. §152(c)(4)(B)(i).
- If resided with both parents for the same amount of time during the tax year, then the parent with the highest adjusted gross income. 26 U.S.C. §152(c)(4)(B)(ii).
- If no parent claims the qualifying child, then another taxpayer can claim the child only if the adjusted gross income of that taxpayer is higher than the adjusted gross income of any parent. 26 U.S.C. §152(c)(4)(C).
Here are some other tax issues to consider in a dispute over children’s tax exemptions:
- The Tax Cuts and Jobs Act of 2017 suspended personal exemptions for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026 (the usual exemption amount of $4,150 per dependent is currently zero). However, the taxpayer must still claim a qualifying child (or qualifying relative) for head of household filing status, the child tax credit, the dependent care credit and the earned income tax credit.
- If you are claiming married but separate filing status, keep in mind that you have the following restrictions that may deter from a battle over exemption rights:
- You cannot take the child and dependent care credit (unless you are legally separated or living apart from your spouse). 26 U.S.C. §21(e).
- You cannot claim the earned income credit. 26 U.S.C. §32(d).
- The maximum income levels required to qualify for the child tax credit are reduced by more than half. 26 U.S.C. §24(b)(2)(C).
- The Michigan Legislature amended the income tax code on February 28th, 2018 in response to the Tax Cuts and Jobs Act of 2017. The old law made the amount of personal exemptions depend on the amount stated in the Internal Revenue Code. The new law now eliminated personal exemption references to federal law and set the amount to $4,050.00 per exemption in tax year 2018, $4,400.00 per exemption in tax year 2019, $4,750.00 per exemption in tax year 2020, $4,900.00 per exemption in tax year 2021, then adjusted for inflation thereafter for tax years 2022 and beyond.
If you have questions about tax exemptions relative to your unique situation or you need legal representation in your Michigan family law case, do not hesitate to contact the tax lawyers and family law attorneys at Kershaw, Vititoe & Jedinak PLC today.