Divorces cause tax issues. One that most ex-spouses with children ask about is which parent is allowed to claim a host of valuable child-related tax breaks. As is often the case with our tax code, the answer isn t so simple. Sometimes, but not always, it depends on which parent is allowed to claim the child as a dependent. Here s what you need to know.

For tax purposes, a child is usually treated as belonging to the parent who has custody for the greater part of the year. That parent is called the custodial parent. The other parent is called the noncustodial parent.

The general rule says the custodial parent can claim the dependent exemption deduction for the child. However an exception to the general rule allows the custodial parent to release to the noncustodial parent the right to claim the designated child as a dependent. (While a release isn t helpful to the custodial parent, it s often a necessary part of reaching a settlement.) I call this exception to the general rule the noncustodial parent rule. As you ll see, it s an important provision for all you noncustodial parents out there.

Under the noncustodial parent rule, the designated child is treated as a qualifying child of the noncustodial parent if all the following requirements are met.

Support Requirement: Over half the child s support for the year must be provided by one or both parents.

Divorced or Separated Requirement: The parents must be divorced or separated under a written agreement at the end of the year or have lived apart during the last six months of the year.

Custody Requirement: The child must be in the custody of one or both parents for more than half the year.

Written Declaration Requirement: The custodial parent must sign a written declaration releasing to the noncustodial parent the right to claim the designated child as a dependent for the year. Under the current rules, the easiest way to meet this requirement is to have the custodial parent sign IRS Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent). The noncustodial parent must attach a copy of Form 8332 to his or her Form 1040.

Tax Breaks Available to Noncustodial Parents

and the noncustodial parent is ineligible.

Dependency Exemption Deduction: This deduction is $3,650 for 2009 and 2010 (subject to partial phase-out for higher-income parents in 2009 but not in 2010).

Child Tax Credit: This credit is $1,000 for each eligible child (subject to phase-out for higher-income parents).

Higher Education Tax Credits: The American Opportunity credit can be worth up to $2,500 during the first four years of a child s college education. The Lifetime Learning credit can be worth up to $2,000, and it covers just about any higher education tuition costs. (Both credits are phased out as the parent s income goes up, but the Lifetime credit is phased out earlier.)

Student Loan Interest Deduction: This deduction can be for up to $2,500 of qualified student loan interest expenses paid by the parent (subject to phase-out for higher-income parents).

Tuition Deduction: This deduction can be as much as $4,000 for higher education tuition and mandatory enrollment fees. (At higher income levels, the maximum deduction drops to $2,000 before being completely disallowed at still-higher levels.)

Important Point: When the noncustodial parent rule isn t in effect for a child, the breaks listed above are completely off limits for the noncustodial parent, but they can usually be claimed by the custodial parent.

Whether the noncustodial parent rule applies or not, the noncustodial parent can usually claim the tax breaks listed below as long as the first three noncustodial parent rule requirements are met (the support requirement, the divorced or separated requirement and the custody requirement). The custodial parent can also usually claim these breaks.

* Itemized deductions for the child s medical expenses paid by the parent

* Tax-free employer-provided healthcare benefits for the child

* Tax-free health savings account (HSA) distributions to cover the child s medical expenses

Some Breaks Are Only Allowed to Custodial Parents

The noncustodial parent can t claim the following breaks based on a child to whom the noncustodial parent rule applies. The custodial parent can if he or she meets the applicable requirements.

Head of Household (HOH) Filing Status: Filing as an HOH is better than filing as a single taxpayer because the standard deduction is bigger and the tax brackets are looser.

Earned Income Tax Credit: This credit can be worth up to about $3,000 for one qualifying child (or up to about $5,600 for three or more). The credit is phased out as the parent s income goes up.

Child Care Tax Credit: This credit can range from $600 to $1,050 for one qualifying child ($1,200 to $2,100 for two or more) based on the parent s income.

Tax-Free Childcare Assistance: This break allows up to $5,000 in tax-free reimbursements for qualified child-care expenses under an employer plan.

For More Information

The rules I ve explained here are not so easy to understand even for pros like me. This is a sad commentary on our absurdly complicated tax system. For more information, I recommend checking out IRS Publication 504 (Divorced or Separated Individuals).