If you are divorced and have children, you should know about recent changes to tax laws, and how these could affect your finances going forward.
In 2018, the federal Tax Cuts and Jobs Act made two significant changes to the child tax credit and the dependency exemption. The new law:
- Expanded the Child Tax Credit. Specifically, it increased the child tax credit from $1,000 to $2,000 per child, and made most of the tax credit refundable. Before, if your child tax credit was more than the tax owed, the tax bill was reduced to zero but any remaining credit was lost. There was no credit if you owed no income tax. Now, even if you owe no income tax, you may be able to claim and receive up to $1,400 per child for the unused tax credit, depending on your total earned income.
- Eliminated the child Dependency Exemption through 2025. Previously, one parent was able to reduce his or her total taxable income amount by claiming the dependency exemption, essentially a tax deduction for each child the parent supports. In 2017, the exemption was over $4,000 per dependent child–potentially a significant impact for whichever parent claimed it. Now that exemption is gone.
Potential impacts for custodial and non-custodial parents
Before 2018, the custodial parent received the Dependency Exemption automatically–unless they chose to transfer the exemption to their former spouse using IRS Form 8332, “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.” This often made good financial sense if the custodial parent had little or no taxable income to which the deduction could be applied, and the non-custodial parent could use it to pay less in taxes.
Instead, a custodial parent is now eligible to claim an expanded and refundable Child Tax Credit–unless they previously signed over their Dependency Exemption. If they did, the non-custodial parent will receive the Child Tax Credit.
If you want to receive the Child Tax Credit as the custodial parent, but had in the past transferred the dependency exemption to your ex, you will need to:
- Revoke IRS Form 8332, the dependency exemption release, by completing and filing Part III of that form along with your 2019 federal tax return.
- Notify your former spouse of the revocation in writing, and document your attempts to do so.
Be aware, however, that the revocation will not take effect until the tax year after you notify your non-custodial ex-spouse. Notice given to your former spouse before the 2020 tax deadline will not impact your 2019 federal return; you must wait until next year to apply it to your 2020 tax return. Visit the IRS website to learn more about the Child Tax Credit.
With a combined 30 years in family law, the attorneys at Jones Family Law Group, LLC, will provide the legal guidance you need. For questions or to schedule a confidential consultation, call 314-449-8830.