Many parents choose to raise a child even though they are no longer together as a couple. Whether this occurs as a part of a divorce or simply between unmarried individuals, it is always wise for both parents to take the time to create fair parenting and custody agreements. Not only do these agreements help both parents understand each other's expectations and priorities, they ensure that parents think through important parenting issues they may otherwise neglect.

One of the most important issues you and your child's other parent should specifically address is the distribution of physical custody of the child and how to share or not share the tax benefits of claiming the child as dependent.

As with all legal issues, it is wise to consult with an experienced attorney to understand the specifics of how to work fairly with your child's other parent to build a life for the child you both love.

How does child custody affect tax returns?

Tax laws offer a number of benefits to parents who claim children as dependents on their tax returns. However, two parents who live separately and raise a child in separate homes cannot both claim the same child on their respective returns.

If the Internal Revenue Service (IRS) discovers that two parents living separately both claim the same child on their returns, it will award one parent the tax advantages and deny those benefits to the other. While the IRS uses a number of methods to determine which parent receives the dependent benefits, it generally favors the parent who retains physical custody of the child for the greatest number of days within the year.

What tax benefits are available?

Different parents may qualify for various exemptions or benefits, but in general, the tax benefits of claiming a child as a dependent include:

  • a tax credit for the child
  • an exemption for the child
  • filing as the head of your household
  • credits for certain kinds of child care expenses

Some parents may also qualify for other, more complicated benefits. However, no matter how many benefits you qualify to claim, you must resolve which parent may use the benefits in a given year.

For many parents, it is useful to simply agree to alternate years claiming the child as a dependent. Regardless of the terms of your agreement and the ways you and your child's other parent choose to claim dependent benefits, be sure that you receive proper legal counsel as you craft these agreements to protect your rights and privileges as parents.

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