The Tax Cuts and Jobs Act (TCJA) was signed into effect on December 22, 2017. For divorcing parents, parties should be aware of changes to dependency exemptions and child tax credits.

Prior to the new tax reform, the dependency exemption reduced taxable income, and parents could exclude $4,050 for each dependent. The new tax law eliminates these dependency exemptions.

Child Tax Credit

A tax credit reduces tax liability and offsets taxes owed dollar for dollar. The new law retains the child tax credit with a new definition. And it increases the credit from as much as $1,000 to $2,000.

How to Qualify for Child Tax Credit

To qualify for the child tax credit, the child must be related to the taxpayer, live in the taxpayer’s home for more than half the year, and not provide more than half of his or her own support. If the parents are divorced, the parties can agree on who is permitted to claim the child as a dependent and qualify for the child tax credit.

Again, the child tax credit is worth up to $2,000 per qualifying child for children up to age 17. The refundable portion is limited to $1,400 (adjusted for inflation). Additional changes include a lower earned income threshold at $2,500 and the beginning credit phase-out increased to $200,000.

Tax reform will force divorcing parties to stake claims to the child tax credits rather than the now-extinct dependency exemption. Ultimately, the credits are even more important. Divorcing couples will have fewer dollars to pay alimony because the tax consequences are different.

The changes will sunset on December 31, 2025, and Congress will then need to vote to extend or let the credits expire.

We suggest you seek the advice of a knowledgeable tax professional before filing your return and ensure your divorce attorney considers all tax changes. Contact us here today.