Who Claims The Kids? The Riddle of Claiming Tax Dependency Exemption

Posted on Tuesday, April 11th, 2017 by Tim Simonson and is filed under Children,  Divorce,  Finances,  Marriage,  Minnesota,  Taxes.

If you’re a parent, and you’ve filed taxes, you’re probably aware that the US tax code permits a taxpayer to claim an exemption for each of his or her dependents. 26 U.S.C. § 151. And, if you are a divorced or separated parent, you may know that if you who had the kids living with you for more of the year than the other parent, you get to claim the child for that tax year. That’s what the tax code says. 26 U.S.C. §152(c)(4)(B).

It gets a little trickier in situations where the kids split their time equally with you and the other parent. We can’t both claim the same child! What do we do? There’s a solution for that! The tax code allows the parent with the highest adjusted gross income to claim the child.

But wait a second, what if that means you end up paying more in taxes, while the other parent with her/his big income and high-powered accountant, gets to claim your child? Not fair! There’s a solution for that too! The tax code gives parents the opportunity to ‘waive’ the right to claim the children for the tax year. The parent choosing not to claim, can provide a waiver to the other parent, who can use that waiver with their tax return. Ok, but what if that wealthy ex doesn’t feel like sharing? This could be trouble.

This is trouble that the IRS does not want any part of. So that the IRS doesn’t get overwhelmed with figuring out which parent gets to claim the child every spring, the tax code gives states the authority to allocate the dependency exemptions.

Minnesota lawmakers didn’t miss this opportunity to give their courts the authority to award a tax exemption to a parent, regardless of what the tax code says. Minn. Stat. §518A.38, subd. 7. This authority of the Minnesota Courts was recognized in the decision Fudenberg v. Molstad, 390 N.W.2nd 19, 21 (Minn. Ct. App. 1986) and the law of the land is that that the allocation of the federal tax exemptions is within the Minnesota court’s discretion. Ludwigson v. Ludwigson, 642 N.W.2d 441, 449 (Minn. App. 2002).

This discretion is not without limits. The court will award the exemption in accordance with the child’s best interests. Rogers v. Rogers, 622 N.W.2d 813, 823 (Minn. 2001). What is in a child’s best interests when it comes to Mom and Dad’s taxes?

According to Minnesota lawmakers, that is determined by:

1) the financial resources of each parent;
2) the parent’s ability to to provide for the child if not awarded the exemption;
3) whether one party or both would receive a benefit from the exemption; and
4) the impact of the exemption on either parent’s ability to claim a premium tax credit or a premium subsidy (ex: would this leave a parent unable to claim the child tax credit?).

Minn. Stat. §518A.38 subd. 7(b).

So, while it is always a good idea to get solid legal (and tax) advice when figuring out who gets to claim your child between you and your ex, remember that it is possible to have a court decide, so long as it is in your child’s best interests, whether it is you or your ex, who gets to claim!

The idea behind the federal tax exemption is to alleviate some of the cost of raising a child, and to incentivize expenditures that benefit children and meet their needs. In figuring out how to maximize parents’ overall ability to spend their money on raising kids, the award of the tax exemption is a useful tool in the court’s toolbox.

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