Parents generally don’t focus on finances during custody negotiations. With exceptions for child support implications, the main concerns are usually what is best for the children and the maintenance of healthy parent-child relationships.
Parents sometimes reach their own arrangements outside of court by negotiating with one another. Other times, they might require a judge’s insight to settle their disputes about time-sharing and legal authority.
The year after the divorce, parents may need to review the custody order before they file their annual income tax returns. Let’s look at some important things to consider.
Only one parent can claim a child as a deduction
While both parents may contribute toward the maintenance of children in a shared custody scenario, the IRS only allows one parent to claim a child for the purposes of tax credits each year. Parents may need to discuss the income tax implications of shared custody and reach a fair arrangement regarding claiming the children on tax returns.
Frequently, the presumption is that the parent with the greater amount of time-sharing claims the children as dependents on their income tax return. However, the parents may agree to let the higher-earning parent claim the children for increased financial benefit. They might also agree to have each parent claim one or more children or to alternate the years in which they claim them.
In cases where one parent does not intend to follow the terms in the custody order, the other may need to act promptly. The IRS does not have access to or enforce the terms of custody orders when reviewing income tax returns.
Learning more about the practical implications of child custody matters and other aspects of divorce can help parents prioritize their financial recovery after divorce. Many decisions have tax implications, including the allocation of time-sharing.