By: Candace M. Williams and Kyle A. Ference
Many clients often wonder about the child dependency exemption when filing for a divorce. The question becomes which parent will be able to claim the child or children on a federal and state tax return during the separation process and long-term after the divorce has been finalized. First available in its current form in 1998, parents of minor children have come to rely upon the Child Tax Credit to put more of their hard-earned money back into their pockets each tax season. While this article does not purport to offer tax advice, and while Congress always has the power to take away the Child Tax Credit, it's a safe bet that this popular provision of the Internal Revenue Code is here to stay. With that in mind, it is important to know what happens to this potentially valuable tax credit when a couple gets divorced. How does a court decide to whom to award the Child Tax Credit? If you have more than one child, can the court split the available exemptions between the parties? This article will answer these questions and more, in the hopes that it will allow you to head into your divorce case more informed about the law in this area and, as a result, better prepared to reach a satisfactory resolution. It is also very important for you to consult a certified accountant and/or tax preparer regarding the issues addressed in this article.
In General, the Court Can Only Award the Child Tax Credit to the Custodial Parent
Understanding this complex legal question first requires defining some important legal terms. Under both Georgia and federal law, the "custodial" parent is the one who has physical custody more than fifty percent of the time, and the "noncustodial" parent is the one who has physical custody less than fifty percent of the time. With those definitions in mind, consider next that the Child Tax Credit is made available by the federal government, whereas your divorce case is a matter of state law. This fact was of primary importance to the Georgia Supreme Court when it ruled, in Blanchard v. Blanchard, that Georgia courts "are not authorized to impose tax liability, nor are they authorized to reduce federal income tax receipts" and, thus, that they cannot award the Child Tax Credit to a noncustodial parent in a divorce action.
In Blanchard, it was important to the Court that federal law allows only the custodial parent to claim the Child Tax Credit. In essence, "[i]f a state forcibly takes the child tax credit from a custodial parent...that parent's income becomes subject to unauthorized tax liability. The state would be exerting the power of taxation, and that power is not subject to state control." In other words, the Georgia Supreme Court ruled that the state cannot allocate federal tax liability, as doing so is within the exclusive province of the United States Congress. However, as described below, there are some important exceptions to this general rule.
Exception One: When the Parties Have a Split Parenting Arrangement
While many divorce and/or custody actions result in one parent having physical custody of the children a majority of the time, subject to the other parent's right to parenting time (e.g., every other weekend), there are other custody arrangements that may change how the court views the allocation of the Child Tax Credit. One such arrangement is referred to as "joint physical custody," which Georgia law defines as "physical custody [that] is shared by the parents in such a way as to assure the child of substantially equal time and contact by both parents." One example of this would be for the parents to alternate physical custody of the children each week. Such an arrangement is most commonly seen when the parents live in relatively close proximity and within the same school district.
In Frazier v. Frazier, the Georgia Supreme Court was faced with a divorce case in which the parties were awarded joint physical custody of their two minor children. The Court, revisiting its prior decision in Blanchard, ruled that a trial court may award each parent a Child Child tax credit where the parenting time is practically equal. It is important to note, however, that following the Court's decision in Frazier, the Georgia legislature passed a law providing that "where a child resides with both parents an equal amount of time, the court shall designate the custodial parent as the parent with the lesser support obligation and the other parent as the noncustodial parent." That law also provides that "[w]here the child resides equally with both parents and neither parent can be determined as owing a greater amount than the other, the court shall determine which parent to designate as the custodial parent..." The implications of this law are clear: in a divorce and/or custody action, the trial court must designate one parent as "custodial" and the other as "noncustodial," even if they both get equal time and are on the hook for the same amount of child support.
So how does this affect the Georgia Supreme Court's holding in Frazier? While the Court has yet to address its holding in Frazier in light of the subsequently-enacted statute, it is safe to assume that the court in your divorce case will adhere to the importance of the "custodial" versus "noncustodial" labels relied upon by the Court in Blanchard. Does this mean that it's impossible for a court to split the Child Tax Credits in cases involving more than one child? Not necessarily. In cases involving a "split parenting" arrangement, "one parent is the custodial parent for at least one child of the parents, and the other parent is the custodial parent for at least one other child of the parents." In such a situation, each parent is both a custodial parent and a noncustodial parent. It is thus likely, given the holdings in Blanchard and Frazier, that the court in a case involving a split parenting arrangement would divide the available Child Tax Credits between the parents in accordance with the number of children for which they qualify as the custodial parent.
Exception Two: The Modification of an Existing Custody Order
In a recent case, the Georgia Court of Appeals was faced with the question of whether a trial court may, in a modification action, change which parent receives the Child Tax Credit. Blumenshine v. Hall involved a case in which the parties had gotten divorced in the state of Wyoming. In their divorce action, the Wyoming court awarded the father the Child Tax Credit for one of the parties' three children, despite the fact that the mother was awarded primary physical custody of all three children. After the mother moved to Georgia, the father petitioned a Georgia court to have the custody arrangement modified. His plan ultimately backfired, and the Georgia court, like the Wyoming court, awarded primary custody of all three children to the mother. The Georgia court also made one other decision that is particularly relevant to the topic of this article: it took away the Child Tax Credit awarded by the Wyoming court to the father and instead awarded it to the mother. The Georgia Court of Appeals in Blumenshine ruled that such a decision was required under Georgia law, as "the parent who was awarded physical custody of the children [i.e., the mother], was entitled to claim the dependency exemptions for the three children."
Given the Georgia Supreme Court's previous rulings in both Blanchard and Frazier, the ruling is Blumenshine is perhaps unsurprising. After all, the previous cases make clear that the "custodial" versus "noncustodial" designation is the controlling factor when it comes to determining which parent is awarded the Child Tax Credit for a given child. The primary takeaway from Blumenshine is that, just because the court in a divorce action awards a Child Tax Credit to one parent, such an award is not set in stone. In a subsequent modification action, the court will likely shift the child tax credit to the party who is awarded primary physical custody.
Blumenshine also raises another important point about the court's power to modify custody where the original action was brought under the laws of another state. Remember, the Wyoming court awarded the father the Child Tax Credit for one of the parties' three children, despite the fact that the mother was the "custodial" parent for all three. If, after reading that, you thought to yourself "But how is that possible? I thought only the custodial parent could be awarded the Child Tax Credit," you have hit upon an important point about the relationship of the laws of different states to one another. In many states, courts do have the ability to award the Child Tax Credit to the noncustodial parent; Georgia, however, as mentioned above, is not one of them. When the father in Blumenshine brought a modification action against the mother in Georgia, the Georgia court was obligated to apply Georgia law. This is important to keep in mind if you are seeking to modify a custody order issued by a court in a different state.
Exception Three: Settlement Negotiations
The third and final exception to the general rule established by the Georgia Supreme Court in Blanchard is technically not an exception at all, but rather a way to avoid even putting this issue before a judge. If the parties in a divorce case can reach an amicable resolution of their case through a settlement agreement, they will avoid the additional time, expense, and stress of prolonged litigation. Perhaps most importantly, they will have more control over the terms of their divorce. They will be able to engage in negotiations regarding marital property, debt, and child custody, and to avoid the risk of asking the judge to make those decisions for them. One of those terms of negotiation is the allocation of the Child Tax Credit. While a judge cannot award the exemption to a parent not designated as the custodian parent, the parties are generally free to use the exemption as a negotiating term. Common arrangements reached through settlement include parents agreeing to alternate which receives the Child Tax Credit each year. In cases with multiple children, parties often divide up the available exemptions between them. Keep in mind that there are certain documents required under federal law for situations in which the custodial parent agrees to forgo his or her entitlement to the Child Tax Credit for a given year.
Hopefully this article has provided you with a better understanding of the options available in your divorce case with regards to the Child Tax Credit. Keep in mind that the information contained herein is not intended to offer tax advice; rather, it is intended to inform you as to how Georgia courts approach this issue so that you may have a better idea of what to expect in your case. You are encouraged to always seek the advice of a tax professional with regard to how and when to file your taxes, as well as the impact any court order and/or settlement agreement may have on your tax liability. The issues that arise in a divorce action can be complex, and the one discussed in this article is but one of many. Contact a family law attorney at Coleman, Chambers, Rogers & Williams today to assist you in this process and to ensure that your rights are protected. Call (770) 534-3770 to schedule a free consultation today.