The year your divorce is final, there are fundamental changes to your federal taxes. For instance, your filing status—married or single—is determined as of the last day of the tax year. Another significant change involves who may claim a child as a dependent.
When a couple is married, it is usually more favorable to file federal taxes jointly and to claim all minor children as dependents on their return. This all changes after a divorce.
The Internal Revenue Service (IRS) mandates that only one parent can claim a child as a dependent for a tax year. The general rule for claiming a dependency exemption turns on whether the child is a “qualifying child” under IRS rules. Five tests apply for a child to meet this requirement: relationship, age, residency, support, and joint returns.
First, the child must meet a relationship test. Children, stepchildren, foster children, siblings, half-siblings, and step-siblings all meet this requirement, as do any of the children of these people. For example, a grandchild or a niece would meet the relationship test.
The second test relates to the age of the would-be dependent. Generally speaking, this test is met if the child is under age 19, under age 24 and a full-time student, or permanently and totally disabled.
The third requirement relates to the child’s residency. This rule requires the child to have lived with the parent claiming him or her as an exemption for more than half of the tax year. Normally, this is the custodial parent. However, under very limited circumstances, the non-custodial parent may claim the child. Before a noncustodial parent claims a child as a dependency exemption, it is usually wise to consult with experienced counsel or a tax advisor.
Fourth, the child must meet a support requirement. This test is met if the child did not provide more than half of his or her own support for the tax year.
Lastly, the child generally may not file a joint return except in very narrow circumstances.
A change in your marital status has many implications for your tax liability. You should consider these issues while your divorce is pending. This will allow you to know the rules and to make adjustments to your withholdings to offset any additional liability when tax time rolls around. For additional information, consult an experienced divorce attorney or your tax advisor.