It is an important but little-known fact that in the event of exactly equal parenting, the tax law provides that the higher-income parent will be considered as custodial.
This seems innocuous, but in fact, this determination could have a number of unpleasant consequences.
First, the lower-income parent would be denied the ability to claim head of household filing status. The parties may have been counting on one being head of household, and the surprise tax determination that this party is not the custodial parent could really upset the apple cart.
The second implication concerns the Child Care Credit. In order to claim the child care credit, a party must provide the child’s home for more than half the year. That is, the party must be the custodial parent for this purpose.
Can You Avoid this IRS Trap?
In order to claim the Child Care Credit, the party claiming the credit must also have made the child care expenditures.
Typically, the lower income parent is the one who makes the child care expenditures.
So if the parties have specified in their agreement exactly equal parenting, and the lower-income parent pays the child care expense, the result would be that neither parent would be eligible to claim the Child Care Credit.
The higher-income parent could not claim because they did not make the expenditures.
The lower-income parent could not claim because they were not custodial.
How do you avoid this situation?
Avoiding the Equal Parenting Tax Trap
You can avoid this situation by specifying in your separation agreement that the lower-income parent is custodial for 183 overnights, and the higher-income parent is custodial for 182 overnights.
Then, you will have stepped out of the trap, because you will not have exactly equal parenting, and the IRS will not be able to decide who is the custodial parent.
Under the provisions of the American Rescue Plan, this is especially important.
Because the maximum Child Care Credit is now $8,000 for 2021, whereas before now the maximum was $2,100. So the maximum Child Care Credit is now almost four times what it was in 2020.
Also, the Child Care Credit was not refundable before 2021, which meant that for many lower-income people, it was no benefit at all.
But for 2021, the Child Care Credit is fully refundable, so almost everyone benefits. (Some very-high income taxpayers are completely phased out and get no credit.)
Be aware that the Child Care Credit reverts after 2021 to what it was before, so the intensity of the concern is greater in 2021 itself.
But still, it is always good to be aware that you should not specify exactly-equal parenting in your parenting agreement.
If child support will be different with 183/182 than with 182.5/182.5, you can calculate child support with 182.5, but still specify 183/182 in the separation agreement.
Then you will spring yourself from the IRS tax trap!
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