When you are entering data for child support calculations, there are two small entries relating to parental time that can have big impacts.
These are:
- The dependent exemption
- The designation of the majority-time parent
These selections are buried, so it will not be immediately obvious that the two calculations are using different selections for these items.
This blog post will discuss each of these choices and the ultimate effect on child support.
Allocation of the Dependent Tax Exemption.
The Dependent Tax Exemption is a tax benefit that allows taxpayers to reduce their taxable income for each qualifying dependent, most often a dependent minor child. If there is no agreement or court order, the parent with the majority of parenting time would be entitled to the allocation of the dependent tax exemption.
However, this is a tax benefit which the parties can allocate by agreement to the minority-time parent.
If the minority-time parent is claiming the exemption, the majority-time parent must complete Form 8332 and give it to the minority-time parent, who files it with the minority-time parent’s tax return.
Currently (at least until the end of 2025) the value of the tax dependent exemption is ZERO.
Why is that?
Under the Tax Cut and Jobs Act of 2017 (TCJA) the standard deduction was substantially increased, and many previously existing personal deductions were eliminated by reducing them during the life of the TCJA provisions (which by their terms expire at the end of 2025).
But even though the dependent exemption is zero, it still matters which party claims it!
That’s because the person who claims the exemption becomes the person who can claim the Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC) — and those credits have value.
The maximum amount of CTC per qualifying child is $2,000. The refundable part of the credit, ACTC, is worth up to $1,700 for each qualifying child in 2024.
Now, thinking back to the child support guideline calculation, this swing of thousands of dollars in tax benefits to one parent or the other will create differences in the final child support results.
Designation of Majority-Time Parent
The second set of tax consequences is more complex and nuanced. The designation of a Majority Time Parent is a status based on facts of actual overnights and cannot simply be allocated by agreement.
There are several tax benefits available to the Majority Time Parent separate and distinct from the Child Tax Credit. These tax benefits primarily include the availability of Head of Household filing status (HOH) and the Earned Income Tax Credit (EITC).
Higher-income parents will not be eligible for the EITC (this depends in part on the number of children as well). So, the designation of Majority Time Parent is more important for lower- and middle-income levels.
Now, what happens when parenting time is officially 50/50? Who is designated as the Majority Time Parent? And why is there such a big difference in the support calculation from this one tiny selection?
Let’s start by acknowledging that in real life there is no true 50/50 parenting time. Add to that the fact that, in most years, there is an odd number of overnights (365). So even the most scrupulously careful couple cannot achieve exactly equal numbers of overnights.
One parent will have at least one more overnight each year than the other.
But the tax code does not worry about splitting hairs that way. It assumes that it is possible to have 50/50 parenting time. And where the couple has designated 50 /50 parenting time, the tax code says that the IRS will consider the Majority Time Parent to be the one with the higher income.
This puts the U.S. Treasury in position to potentially receive more tax revenue, as the higher earning parent is less likely to eligible for the Earned Income Tax Credit. On the flip side, the tie-breaker rule provides worse monetary results for the family.
In families with more than one child, some professionals have tried to deal with this problem by designating each parent as Majority Time Parent for at least one of the children.
Unfortunately, this will give different results than seen with a 50/50 designation, because that will often trigger a ‘Split Custody’ calculation, which yields yet another guideline result.
Now, depending on the choices being made for the dependent exemption and Majority Time Parent, the professional can be looking at three or more different results.
In an “equal” parenting time situation, which one is correct?
That is a trick question, because, as we have seen, there is no single obviously correct answer.
You just have to reflect the client’s situation as accurately as you can. And be sure that everyone who is doing the calculation is making the same choice, so they all get the same result.
Family Law Software Solutions
In Family Law Software we have a page that allows for side-by-side comparison of child support computation options.
Let’s start by understanding that, in Family Law Software, there are two separate and distinct checkboxes: one for Majority Time Parent and the other for Dependent Exemption. As previously mentioned, these are both important choices. They do not have to be allocated to the same parent.
Next, go to our What If page for child support side-by-side options, found in the Analysis Section on the page called Support What If. (Basic Edition users of FLS will not have access to this function).
On this page, you can explore all the different permutations of Majority Time Parent, Dependent Exemption allocation, number of overnights, and filing status and see the resulting support amounts calculated for each scenario.
Often, choices that change net income will also change guideline maintenance as well. The key for the knowledgeable attorney is to not only look at the support and maintenance numbers themselves but also look at the Support Impact report for each scenario to see the resulting impact on the financial situation for the entire family.
To accomplish this, swap each scenario in turn for the Actual column, and then flip to the Support Impact report and print (PDF or Print) each one to be able to compare them.
Looking at the child support results that you get in all possible scenarios may help to suggest some kind of average value among all of them, or clarify which option is best for that family.
Each child support case raises unique issues. But these apparently-tiny decisions about dependency and majority time parent can have surprising impacts.
Learn more about these and other important issues in our child support webinar.
Helpful Resources
IRS “What You Need to Know about CTC, ACTC and ODC”: https://www.eitc.irs.gov/other-refundable-credits-toolkit/what-you-need-to-know-about-ctc-and-actc/what-you-need-to-know
IRS “Child Tax Credit”: https://www.irs.gov/credits-deductions/individuals/child-tax-credit
IRS Topic No. 503 Child and Dependent Care Credit: https://www.irs.gov/pub/irs-pdf/p503.pdf
IRS Topic No. 504 Divorced or Separated Individuals: https://www.irs.gov/pub/irs-pdf/p504.pdf