The American Taxpayer Relief Act of 2013 directly affects divorced parents as it changed the rules regarding dependency exemptions. The allocation of dependency exemptions not only has a direct impact on the amount of tax one must pay, but also the availability of tax credits. To qualify for the $1,000 per child tax credit, one must be entitled to the dependency exemption for that child. On the other hand, a divorced parent does not need to be able to claim a child dependency exemption in order to file as head of household, or claim an earned income credit so long as the other prerequisites are met.
In determining the allocation of dependency exemptions, Ohio courts are directed to do so in the best interests of the children. The factors to be examined include the parties’ gross incomes, other exemptions and deductions, federal, state, and local income tax rates, and the net tax savings generated by allocating the exemptions to one parent or the other. In theory, when there is a net tax savings, there will be more money available for the children. It is not unusual, especially where the net tax savings is about equal, for the parties to agree, or the court to order, splitting of the exemptions. When there is only one exemption, the parties may alternate the years in which they claim the exemption.
The federal personal exemption for the tax year 2013 is $3,900. If one is in a 25% tax bracket, the tax savings of having a child’s dependency exemption would be $975 if the parent could fully take advantage of the exemption. The 2013 Tax Relief Act reinstated a phase out of the exemption based upon adjusted gross income. The phase out had been eliminated for the tax years 2010-2012. The benefit of claiming a dependency exemption will be lost, in whole or in part, to taxpayers with high adjusted gross income. The phase out will, obviously, affect negotiations and court determinations of the allocation of dependency exemptions. It is not in the best interest of a child to award the dependency exemption to one who can not benefit by it.
The personal exemption amount is to be reduced by 2 percent for each $2,500 or part thereof, by which a taxpayer’s adjusted gross income exceeds a threshold amount depending on tax filing status. For example, a single filing person’s phase out begins at $250,000 of adjusted gross income. One filing as head of household has a threshold amount of $275,000. At $371,500 for the single filer, and $397,500 for the head of household filer there will be no tax savings for having the dependency deduction It will be completely phased out.
The reinstatement of the dependency exemption phase out is only one of several provisions of the taxpayer Relief Act of 2013 which, in reality, provides no relief at all.