Dear Cassie: Do I have the right to claim our children as a dependent on my income taxes, even when I don’t have primary custody of them?
Dear M.S.: You may already have a Settlement Agreement, Judgment of Divorce, or Order which addresses the right of either party to claim the child or children as a dependent, for purposes of the child tax credit (on your federal income tax returns) and for purposes of the dependency exemption (on your State of New Jersey income tax returns). In that event, that document would control the answer to your question.
As it relates to claiming a child for purposes of the child tax credit, there are several requirements you must fulfill in order to take advantage of this tax savings, the most important of which are having a child age 17 and younger, and living with the child for more than half of the year. In the context of a custody matter, the parent of primary residence, or the parent with whom the child resides for more than 50% of the time, is the parent who is eligible to receive this credit. Notwithstanding, parties can negotiate an agreement such that the parties can alternate claiming this credit.
The child tax credit can be valuable. Initially, pursuant to the Tax Cuts and Jobs Act of 2017, the tax credit that you received for having a child under the age of seventeen equated to up to $2,000.00 per child. Pursuant to the American Rescue Act of 2021 (pertaining to the tax year 2021 only), the child tax credit can be as much as $3,000.00 per child for children ages 6 through 17, and $3,600.00 for children ages 5 and under.
Pursuant to the Tax Cuts and Jobs Act of 2017, the refundable portion of the child tax credit was limited to $1,400.00 per child. Pursuant to the American Rescue Act of 2021 (again, pertaining to the tax year 2021 only), the credit is fully refundable for 2021.
The child tax credit is a credit applied to the actual tax you owe. In contrast, the dependency exemption on your State of New Jersey income tax return equates to a reduction in your taxable income. In this fashion, the child tax credit can be far more valuable.
By way of illustration, if your tax liability amounts to $4,000.00 and you apply a child tax credit for $3,000.00 (for a child between the ages of 6 and 17), your tax liability will reduce to $1,000.00 for 2021. Likewise, if you owe zero dollars in taxes to the IRS and apply a child tax credit for $3,600.00 (for children ages 5 and under), then you may be refunded up to $3,600.00 for 2021.
Importantly, there is a “phase out” to whom may claim the child tax credit. Pursuant to the Tax Cuts and Jobs Act of 2017, single taxpayers with a modified adjusted gross income of up to $200,000.00, and taxpayers filing jointly earning up to $400,000.00, were eligible to claim the credit of up to $2,000.00 per eligible child. If you earn above those thresholds, you will not derive any benefit from claiming the child for purposes of the child tax credit. Pursuant to the American Rescue Act of 2021, single taxpayers with a modified adjusted gross income of $75,000.00 or less, taxpayers filing head of household with income of $112,500.00 or less, and taxpayers filing jointly earning $150,000.00 or less are eligible to claim the additional credit amount. Above these income thresholds, the extra amount above the original $2,000.00 credit—either $1,000.00 or $1,600.00 per child—is reduced by $50.00 for every $1,000.00 in modified adjusted gross income.
Of course, this issue is very fact specific. If you are dealing with the issue of the child tax credit, you should seek the advice of both family law counsel and your tax professional.
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Cassie Murphy is a divorce and family law Partner with the Law Offices of Paone, Zaleski & Murphy, with offices in Red Bank and Woodbridge.