Claiming children as tax deductions when sharing custody

 

The general rule is that whichever parent has a child most overnights per year is entitled to claim that child as a tax dependent.
However, with the trend of more parents having equal, or 50-50 shared custody after a separation or divorce, the question often arises as to which parent can claim the child on their tax return.
The best answer is for both parents to agree. This arrangement can be formalized in a custody agreement or property settlement agreement (also known as Equiitable Distribution). There can also be an informal understanding between the parents.
Obviously the tax deduction is more valuable to the parent with the higher income. Sometimes an economic deal can be made in which the other parent receives some other financial consideration in return for surrendering the right to claim the tax deduction. Another arrangement is to swap the tax deduction between the parents in alternate years.
If the parents are unable to agree, then the Internal Revenue Code rules. The law states that the parent with the "highest adjusted gross income" is entitled to the deduction. That law is IRC section 152(c)(4)(B)(ii). This rule is called the "tie-breaker rule."
The right to claim the child as a tax dependent is quite valuable, and if a parent qualifies under the current tax law can entitle them to other tax benefits such as head of household filing status, a child care and dependent care credit, a child tax credit, an earned income credit, certain itemized deductions and an education credit.