Exes who work together with their tax professional can often reduce their overall taxes or increase their refund, leaving them more money to spend on their children.
If you have a child with an ex-spouse, or even someone that you weren’t married to, you might already know how complicated the whole tax situation can get. Who can claim what? And if you now hate each other, then it’s really a problem.
But—if you and your ex get along and you want to work together to make the best situation for your child—then I’ve got a tax strategy for you to help you maximize your refund.
This strategy only works for couples that get along, and basically share physical custody. If this sounds like you and your ex, then you two are perfect candidates to work together on your taxes. If your ex is an absentee parent stop, this isn’t for you. If your ex is a nasty person, stop, this isn’t for you either.
If your ex is a decent, trustworthy human being, then you can continue.
The first step is for you and your ex to do your own taxes the way you normally should. For example: let’s say your divorce decree states that you are the custodial parent and your ex gets to claim the exemption for the child. That’s how you prepare your taxes and set the baseline for what your refund or balance due should be.
An example might help. Let’s say that Barbie and Ken had a child named Penny and then got divorced. Although Barbie and Ken basically share custody of Penny, if push comes to shove, in the divorce decree, Barbie is the custodial parent. Per the decree, Ken is allowed to claim Penny’s exemption every other year. So the way for them to file is for Barbie to claim the head of household filing status, but not claim Penny’s exemption. Barbie also gets the Earned Income Tax Credit and the Child Care Credit for Penny’s daycare expenses. Ken gets the exemption, and the Child Tax Credit.
That’s how you determine the baseline for Barbie and Ken. Let’s say that in this example, Barbie would get a refund of $1500 and Ken would get a refund of $1000. Together they get $2500.
There are FOUR Scenarios to this. When preparing your taxes, you’re going to run all four scenarios:
- YOU claim no child, single, 1 exemption for yourself. EX claims: 2 exemptions; one for his/herself, one for child, AND claim EIC and head of household and child care credit
- YOU claim child for EIC and head of household filing status and child care credit, 1 exemption for yourself, no exemption for child, sign 8332 to other parent. EX claims: 2 exemptions; one for him/herself, one for child, no EIC, no head of household
- YOU claim 2 exemptions; one for yourself, one for child, no EIC, No head of household, EX claims: child for EIC and head of household filing status, 1 exemption for him/herself, no exemption for child, sign 8332 to other parent.
- YOU claim 2 exemptions; one for yourself, one for child, AND claim EIC and head of household and child care credit. EX claims: no child, single, 1 exemption for self.
Let’s plug the numbers for Barbie and Ken in here. Scenario 1: Barbie owes $800 and Ken gets a refund of $4500. The combined refund is $3700.
Scenario 2: this is our baseline. Barbie gets a $1500 refund, Ken gets a $1000 refund. The combined refund is $2500.
Scenario 3: Barbie gets $1000 refund, Ken gets $3100. The combined refund is $4100.
Scenario 4: Barbie gets $2600 refund and Ken owes $900. The combined refund is $1400.
So in Barbie in Ken’s case, it makes send to let Ken claim EIC and head of household filing status and have Barbie claim the exemption. It gives them back and extra $1600!
Now Barbie has a right to her $1500, and if she files using scenario #3, she’s losing $500. So to make Barbie whole again, Ken would need to pay her back the $500 from his refund. And they would also have to agree on how to use the extra refund money.
I always recommend that you put the extra money you get into a savings account or 529 plan for your child. The only reason you can do this is because of your kid, so I think the money should go towards raising your child. But it’s up to you.
Remember, only parents that get along can do this. If you hate each other, then you strictly go by the IRS rules for divorced or separated parents. Once you do this, you can’t go back to the IRS because you changed your mind.
Put proper safeguards in place. If you’re the parent that will get a lower refund than you normally would have, make sure that your ex sets up the part of his/her refund that makes you whole will come as a direct deposit into your bank account.
Make sure the part of the refund that is supposed to go to your child goes into your child’s account as well.
Remember, this strategy is not for everyone. But for some families, it can be worth a decent amount of money.
Thank you Michael.
Hello
This is really great advice! Everyone should calculate the various scenerios, and this is exactly why I suggest everyone work with an Enrolled Agent, CPA or tax advisor. The free do it yourself software is not going to run all of these calculations. Additionaly, the software only tells you what what you qualify for based off of what you imputed into the program, it doesn’t have the foresight to know that is you structured things differently you could save a lot of money.
If either spouse is eligible for nonrefundable tax credits like the retirement savers credit, the difference could be large between various claiming options.
I’m going share this on twitter and facebook.
Hi Kara,
I don’t think there’s any easy way to explain it. But you should prepare your taxes showing what you get with and without claiming your son. And then you can see how much your ex contributes towards your child’s upkeep. Show him how much more you pay for his medical and his childcare. That’s all you can do. Good luck.
Hello,
My son’s father and I have been getting along for about 6 months. We both have full time jobs, but I make a lot more than he does, but I’m also the custodial parents so I pay for more than 90% of the childcare expenses, and 100% of medical expenses. He keeps insisting that we switch on and off each year claiming our son on our taxes. But he doesn’t pay anywhere close to an amount during the year to earn the child tax credit and I’m not okay with him claiming our son until he contributes more. What is the best way to tell him it’s not in our son’s best interest for him to claim him until he starts contributing more. In the 4 years our son has been alive, he has paid child support, but never any medical and never any “extra” for anything else, especially daycare/preschool. I’m trying to avoid a verbal argument, because we have been getting along lately, but I think this is going to be an issue with him since in the beginning of our child’s life, neither of us had a job and so it wouldnt have madee as big of a difference. Is there a way to make this go smoothly so he understands that he doesn’t get to pay next to nothing toward the child and then still get all the tax benefits?
Hi Susan,
You’re right, the custodial parent should be filing the FAFSA. He’s a link to a helpful page about that: https://studentaid.ed.gov/sa/sites/default/files/fafsa-parent.pdf
I should have spelled it out more carefully in #4. I was making the assumption that spouses here have equal 50/50 custody and you know the old rule about making assumptions-I shouldn’t do that. Thanks for pointing that out.
Hi Jan,
I have a question about your comment #4 when you said the person claiming the child for a dependency exemption should be filling out the FAFSA. I thought the person who filled out the FAFSA was the person whom the child lived with the most,even if they didn’t claim the dependency exemption.
Hi Bob,
I think claiming single with 2 exemptions on your W4 makes sense. Now as far as claiming EIC and head of household–does one of the children actually live with you? If yes, then EIC and head of household make sense. If not, then you really can only claim the exemption.
Remember, your child only has to live with you 50% of the time to claim EIC and head of household, and of course it helps if your ex isn’t claiming your child either.
I worked with a divorced couple for years who shared custody and they each claimed one child and head of household. I suspect the kids actually spent more time at the Mom’s house, but the couple worked together on this and they never had a problem.
I have a question? My wife and I are separating and in the process of divorce. We have two children and we get along pretty well. I have a FT job and she works two PT jobs. We both agree that we each get to claim one child on our taxes. My question is, when changing my W4, should I claim “single-2exemptions”? One exemption for myself and one for the child I am claiming on my taxes? Would I still also claim head of household and claim EIC? Thank you!
Hi Ann,
You seem to understand how the system works–even if your ex doesn’t. Your biggest problem seems to be — you don’t really agree on how to split things.
It’s not tax fraud to split the exemption from the EIC – otherwise I’d be in jail right now. But you do have to follow the rules. Its sounds to me like you’re following the rules.
One thing to think about when dealing with the FAFSA–the person claiming the child should be filling out the FAFSA. If your ex makes substantially more than you do–he might want to reconsider that.
We sort of have this situation, with a lot of variables. My ex and I have joint custody, and all our decree says past the first year is that “we’ll agree” on who claims which kids. Four kids, no child care credit, some educational credits, they have now aged out of child tax credit and only some fulltime college students as they get older.
We found that it was beneficial the first year to actually not do what the decree said, so we went with the maximize benefit/credit, reduce tax liability route and split the kids, no one was eligible for EIC and only I was for HOH (he didn’t have a residence and they lived with me or at school). He took the two younger ones, and child tax credit on one. I took the older two, and some ed credits. The decree said I’d take the younger ones but I couldn’t get the tax credit due to investment income (divorce forced the sale).
The next year, there was a huge income shift, and I only needed one kid to maximize my return, so I took one deduction and one child tax credit and let my ex take two (the oldest had aged past 23 and was on his own, I dont know if he claimed him or not as he’s still a student though), but I took the three for EIC, since they lived with me/used it as their address while at school. I filed HOH, I don’t know what he did, but he wasn’t really eligible (didn’t have a residence the whole year, kids were with me or at college the majority of the year).
This year only two qualify for EIC although the third is a dependent but not a student, and ex has had a residence, but not half the year, and they’ve, yes, been with me more. So I filed taking two deductions, and two EIC, but not the same kids.I claimed the two that use my income for FAFSA for EIC, all three were over 17 but only two were students, Ex goes NUTS, starts saying I can’t do that, I said, I’m doing what we’ve always done, minimized my income for FAFSA and taking the most EIC available (he’s knocked out of it by income). He insists that he needs them for HOH, which, again, he’s sketchy close to being half time if he counts where the oldest slept on breaks, but that’s never mattered before he says. I maintain he can claim the middle child non student as his qualifier for HOH, give me the deduction, I claim the younger one’s deduction and EIC, I take the older one’s EIC but give his deduction to his dad, and we’re all good. If he wants to use residence as a qualifier, which besides not being the way it’s been done with us up until now, it will result in him not being able to file HOH. I”m pretty sure he’s freaking out because he realized I claimed EIC last year on two he claimed a deduction for. He’s afraid it will trigger an audit. He won’t see it my way, keeps saying we can’t split kid credits. I showed him the Pub 17 et al and he refuses to agree. If I give him two deductions this year, I’ll still be ok, but if he insists that the older one is “his” and I can’t use him for EIC, it will kill me to the tune of $3K. I”m not seeing how if he’s not claiming EIC it matters either way.
The biggest problem here I now see is that no one has ever filled out the 8332 in three years. So yeah.
I meet custodial parent all three years for all three/four kids either because they actually slept here more/most, or used it as their permanent address while they were at school. Problem is, the youngest, the only one that will be eiligbile for EIC from here until 23, decided he wants to live with his dad this whole last semester his senior year, which I of course agreed to, he’s not gotten to be with his dad as much. But then once he goes to college, technically his dad will be the custodial parent, and if he pulls that on me, I can’t do anything about it for 2015. So I’ve been nice and let him take them, but he’ll be in the position to take it from here on out. But. Can he still use my return for FAFSA then? Or do I say I need to claim him for that to keep him?
I know technically we’ve played a shell game, that if I file 1040xs I can claim all of them based on where they physically were all three years, and it will trigger a boat load of hurt on both of us and not necessarily net me anything other than ill will. Even if I stand my ground and try to maximize the FAFSA and my returns and credits this year, the problem is that next year only one kid will qualify for EIC or deductions (older one will age out and the middle hopefully will have job, although I’d love him to go to school) and I really need to to offset the taxes I owe on the alimony he gives me, but he’ll be using that as his permanent address and his dad will technically be the custodial parent. I’m trying to do what you said above, and he insists its tax fraud to split the deduction and EIC. The way I see it, he’s the one closer to tax fraud for trying to claim HOH (which I now suspect he did even when he was renting only parts of two years, the rest of the time he lived with family) than I am for claiming EIC. I would have loved for him to have had a place and taken them, but he didn’t. I really really want to get the most FAFSA benefit for the kids that we can because I don’t see being able to give them any other assistance.
Hi Kevin, Although a good portion of the tax owed is going to be on you, you still want to file injured spouse to get whatever you can.
Hi. Injured Spouse question. Every year I file injured spouse and get the full refund as my wife doesn’t work. Im the injured spouse. This past year I collected unemployment @$8,850 and have self employment income of $8,000. But this year my wife worked and made $12,000 but no federal withholding was taken out. We qualify for earned income credit of $5,434, Child tax credit $1,000 and the American Opportunity credit for $1,000. We have 3 kids as dependents. Not sure if I will get any of the refund which comes out to over $7,000? Should I file injured spouse?