Shared Custody and a Child Care Tax Deduction

The Child and Dependent Care Credit allows you to deduct some of the expenses you pay for child care from your taxable income. Unlike a deduction, the credit directly reduces your adjustable gross income. To qualify for the credit, you must pay for child care so that you can work. You can’t make the payments to your spouse or to the child’s parents. You must have earned income and your filing status must be married filing jointly or head of household. You also need to provide the name, address and Social Security number of the person or child-care facility you pay to look after your child.

If you share custody of a child, you and your spouse can take turns claiming your child as a dependent on your tax return. You can stipulate this in your divorce decree, with one parent taking even-numbered years and the other claiming the child in odd-numbered years. However, even if you claim the child as your dependent, you still may not be able to take the Child Care Tax Credit. The IRS rules for taking the credit are separate from the rules for claiming your child as a dependent. If you meet the IRS definition for custodial parent, you could claim the Child Care Tax Credit even in a year in which you’re not claiming the child as a dependent.

The IRS says the custodial parent is the parent with whom the child lived more than 50 percent of the time. If you have shared custody and your child lives with each of you half the time, the IRS says the custodial parent is the parent with the highest Adjusted Gross Income. Even though the tax code allows you and your ex to take turns claiming the child as a dependent, you can’t trade off claiming the Child Care Tax Credit – the credit always belongs to the parent who meets the IRS definition of custody.

In order to take turns claiming the Child Care Credit on your taxes, you and your ex need to agree to switch off custody each year. You do this by altering the number of nights your child spends at each house, so that one year he’s with Dad more than half the nights, and the other year he’s with Mom more than half the time. This takes coordination – or having everything spelled out in writing in the divorce decree – but if you both contribute to child care expenses, it’s one way to make sure you get the deduction you’re entitled to.