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.