Dependent Care Credit

[Gary2]

Another thought occurred to me:

If the other parent doesn't need the child to qualify for HoH or EIC (and granted, that's a big if), then since they're already close to 50/50 on actual residency, they could have both kids spend the 183 nights with dad, and have him release the exemption to the ex. This will allow him to claim the daycare credit for both kids, while the mom will still get the exemption and child tax credit.

As a practical matter, I'm starting to think that divorce attorneys who stipulate that the non-custodial parent must pay the full cost of child care ought to apply a $300/$600 reduction (or other mutually agreeable amount) to offset the day care credit. Or else hide the cost of day care within the overall child support, so that it doesn't get to be an annual bone of contention.

[taxea]

just a thought here, and i'm not sure if it's right or not, but: would he qualify to claim the child as his dependent, does he pay enough child support (including the day care payments), and if yes, why not pay spouse and she can pay the daycare herself and claim the child care credit and he claims the dependent? am i overthinking here?

yep...OP says Cannot claim children as dependent.
If that is the case he cannot take the credit and trying to skirt the law to save on taxes is not a good idea. If he wanted the child credits he should have gotten custody of the kids. Just because the courts issue requirements (if this is the case) of the non custodial parent does not mean it negates the tax law on the subject.

[Gary2]

If they're literally alternating kids, i.e., one week he has Bobby, the next week Suzie, the next week Bobby, then yes, they can each be the custodial parent of one child, avoid the 8332 and all the other complexities. I'd advise keeping some semblance of records, e.g. writing the weeks down in a calendar and recording any exceptions or special cases.

If it's one week he has both kids, the next neither, the next both, then both kids have the same custodial parent - depending on who has them the most. They could have a small exception to the alternate weeks (e.g., for Thanksgiving week only, Bobby stays with dad instead of mom, even though the schedule calls for both kids being with mom) to get the same results as above. Again, documentation is advisable.

This still leaves open the question of the ex not being able to claim the child care credit because she isn't paying for it directly. The rules around this general situation can be inconsistent.

For example, if a college age kid is allowed to (and does) claim his own deduction, but grandma pays his tuition directly to the college, then he's still allowed to claim the tuition credit even though he didn't pay it out of his own pocket. Likewise, if one ex has to pay the mortgage as part of alimony while the other ex lives in the house (and is the sole owner), the mortgage payment is alimony, the party living in the house claims the mortgage payment as alimony income and takes the mortgage interest deduction, even though the ex paid it directly to the mortgage company.

On the other hand, in other cases involving mortgage interest, or for things like the student loan interest deduction, we look at who actually paid it.

For the child care credit in the case of divorced/separated parents, I don't know of any IRS ruling or regulation, or any court cases that clarify the situation. They may exist - I just don't know. In the absence of any authority, my only comment is that I'm not going to say that another preparer's approach is definitively right or wrong.

[New York Enrolled Agent]

Since the kids spend one week with him and one week with the mom, then he needs to be sure that the child he claims is actually in his home for more than half the year so that the physical custody isn't an issue.

For tax years beginning after 7/2/2008, Reg §1.152-4 gives the answers. I suggest the entire regulation be read (with all details such as the number of nights are equal) but one snip (emphasis added):

(d) Custodial parent.
(1) In general. The custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year, and the noncustodial parent is the parent who is not the custodial parent. A child is treated as residing with neither parent if the child is emancipated under state law. For purposes of this section, a child resides with a parent for a night if the child sleeps--
(i) At the residence of that parent (whether or not the parent is present); or

(ii) In the company of the parent, when the child does not sleep at a parent's residence (for example, the parent and child are on vacation together).

[oceanlovin'ea]

Since the kids spend one week with him and one week with the mom, then he needs to be sure that the child he claims is actually in his home for more than half the year so that the physical custody isn't an issue.

Linda, EA

[New York Enrolled Agent]

This is what the IRS says in Notice 2006-86 - underlines added

If §152(e) applies, a child may be treated as the qualifying child of two taxpayers. A noncustodial parent may claim the child as a qualifying child under §152(e) only for purposes of the child tax credit under §24 and the dependency deduction under §151. However, the noncustodial parent may not claim the child as a qualifying child under §152(e) in determining head of household filing status under §2(b), the earned income credit under §32, the child and dependent care credit under §21, or the exclusion from income for dependent care assistance under §129. Only the custodial parent (or other eligible taxpayer) may claim the child as a qualifying child for those purposes.

[Gary2]

They have joint custody. Divorce decree says he can claim one child and she can claim one child. But he pays ALL of the costs for their private school and the aftercare for both kids. But since he can only claim one child he can only claim the after school care for the one he claims. She can't claim the after school care expenses because she doesn't pay them.

So the deduction for that child is just lost.

As far as the IRS is concerned, there's no such thing as joint custody. The custodial parent is determined by actual living arrangements, not the divorce decree.

The fact that he can only claim one exemption is totally irrelevant to the child care credit. Only the custodial parent can claim this credit, even if the non-custodial parent claims the exemption.

[Davc]

Legal custody and physical custody are not the same thing. The credit (and control of the dependency) goes to the parent with greatest time of physical custody.

[oceanlovin'ea]

They have joint custody. Divorce decree says he can claim one child and she can claim one child. But he pays ALL of the costs for their private school and the aftercare for both kids. But since he can only claim one child he can only claim the after school care for the one he claims. She can't claim the after school care expenses because she doesn't pay them.

So the deduction for that child is just lost.

Linda, EA

[Gary2]

Taxpayer (father) pays the private school tuition (not a deduction) and the after school care for 2 children. Divorce decree allows each parent to claim one child. So he can only deduct the after school care for one child and she can't deduct it for the child she claims because she doesn't pay it.

Who has physical custody?

The statement of the divorce decree about allowing each parent to claim one child is totally irrelevant to the childcare credit. The childcare credit may only be taken by the custodial parent (unless someone, other than the two parents, can and does take the dependency exemption).

[okie1tax]

Dependent care

Linda, would you clarify that a little? It seems you are saying the children live with her or maybe only the one child, as he claims the day care for one.

[oceanlovin'ea]

similar situation

Taxpayer (father) pays the private school tuition (not a deduction) and the after school care for 2 children. Divorce decree allows each parent to claim one child. So he can only deduct the after school care for one child and she can't deduct it for the child she claims because she doesn't pay it.

Makes a touchy situation for families.

Linda, EA

[Davc]

just a thought here, and i'm not sure if it's right or not, but: would he qualify to claim the child as his dependent, does he pay enough child support (including the day care payments), and if yes, why not pay spouse and she can pay the daycare herself and claim the child care credit and he claims the dependent? am i overthinking here?

Child support does not count as support provided by the non custodial parent.

[Gary2]

just a thought here, and i'm not sure if it's right or not, but: would he qualify to claim the child as his dependent, does he pay enough child support (including the day care payments), and if yes, why not pay spouse and she can pay the daycare herself and claim the child care credit and he claims the dependent? am i overthinking here?

If he and his ex meet the requirements for splitting the benefits, and if the ex agrees by signing Form 8332 (or if their divorce meets the requirements), then he could indeed claim the children as dependents. However, the base note says he can't claim them, without saying why he can't - perhaps the ex won't agree, or the divorce agreement doesn't allow it.

As for whether the ex can claim the dependent care credit, assuming the ex has earned income or otherwise meets the requirements (along with ex's current spouse, if any), then the main question is whether the ex is allowed to claim the expenses paid directly by the non-custodial parent to the agency. My inclination is to treat it the same as if paid directly to the ex as child support, and the ex then paid the agency. However, I don't have any citations handy to back it up.

[taxmom34]

just a thought here, and i'm not sure if it's right or not, but: would he qualify to claim the child as his dependent, does he pay enough child support (including the day care payments), and if yes, why not pay spouse and she can pay the daycare herself and claim the child care credit and he claims the dependent? am i overthinking here?