The Dependent Exemption
Regardless of whether you itemize your deductions, the dependent exemption offered qualified parents the opportunity to claim $3,300 per child in 2006. When you add a new child to your family, you can claim the exemption for that year, even if the child was born or adopted on New Year's Eve. Typically, the parent with whom the child lives for more than 50 percent of the time claims the dependent exemption. If you share joint physical custody, some parents agree to alternate the deduction from year to year.
However, it behooves you to make sure you are not surrendering this tax asset too quickly. After a divorce or separation, fathers generally have higher incomes than mothers. If you didn't negotiate who would take advantage of the dependent exemption at the time of your divorce or separation, it generally makes sense for you to receive the deduction.
As of 2006, the federal government began phasing out higher income restrictions on dependent exemptions. By 2010, regardless of your income, all parents will be able to claim full personal and dependent exemptions. Until then, if your adjusted gross income exceeds $150,500 (single) or $188,150 (head of household), you can check with the IRS to see if you are now eligible for a partial exemption.
If the father balks, use it as a bargaining (but not a punishing) chip. No matter what he thinks, the reality may well be that you earn far less, have fewer deductions, and provide more than 75 percent of your children's care. The mere fact that he has a higher income means that you need the deduction more than he does. It might also make sense to review the situation annually. If you really don't need the deduction, offer it to him in return for depositing half of his savings into your child's college funds.
If you are rightfully entitled to the dependent exemption, your former partner cannot use it unless you file IRS Form 8332, “Release of Claim to Exemption.” This form allows you to designate whether you are transferring the exemption for one year or for another length of time.
The dependent exemption is a valuable tax asset and something you should do your best to use. If you must surrender it to the children's father, use it as bargaining chip, as mentioned above, asking that he deposit half of his savings into your child's college funds.
To compute the value of the dependent exemption to your former spouse, make sure you multiply the exemption by his tax bracket. For example, if the father's income will be taxed in the 25 percent bracket, he would save $825 (based on $3,300) per child. If your income falls in the 10 percent bracket, you would save $330 (based on $3,300). Base your negotiation on what he would save, in the first example, pegging $413 into your children's college funds.
To qualify for the dependent exemptions, all of the following requirements for eligibility must be met:
The child must be your biological, step, foster, or adopted child. There are exceptions. If you are providing more than half of her support, if she lives with you the entire year, if she meets the other requirements, and if no one else is claiming her as an exemption, you may still be eligible for the exemption. Also, a child placed for adoption but whose adoption has not been finalized is eligible. (Consult with a tax advisor or call the IRS to confirm.)
The child must live with you at least 50 percent of the year. (If a child is born at any time during the year, she is eligible for the exemption. If she attends boarding school, but you are still supporting her, she qualifies. Other exceptions may exist; call the IRS to confirm eligibility.) The child is under the age of 19. There are exceptions: if she is a full-time student under the age of 24; if she is permanently and totally disabled; if she is not claiming herself on a separate tax return.
The child must be a U.S. citizen or a resident of the United States, Canada, or Mexico. Your adjusted gross income must be within the limits established by that year's tax code (less than $150,500 in 2006).
Even if you are receiving a refund, you may be able to add a portion of the child tax credit to the refund amount, increasing the amount you'll receive from the IRS. To determine your eligibility and compute your amount, obtain Form 8812, “Additional Child Tax Credit,” and the complementary IRS booklet. To increase the benefit, add the amount gained to your child's college fund account.
The IRS provides free booklets annually that provide eligibility guidelines. You can find them online or by calling your local IRS office.