Goodbye Dependency Exemptions!
Some provisions of Trump’s tax plan do not take effect until 2019. However, certain changes are applicable immediately. In 2018, exemptions for dependents no longer exist, but the Standard Deduction and the Child Tax Credit were increased.
Formerly, each dependent child was worth a $4,050 tax exemption.A tax exemption directly reduces your income (pre-tax), while a tax credit reduces your tax liability. Previously, divorcing parents could either agree on how to share dependent exemptions or have them divided statutorily. Colorado Revised Statute Section 14-10-115 states:
(12) Dependency exemptions. Unless otherwise agreed upon by the parties, the court shall allocate the right to claim dependent children for income tax purposes between the parties. These rights shall be allocated between the parties in proportion to their contributions to the costs of raising the children. A parent shall not be entitled to claim a child as a dependent if he or she has not paid all court-ordered child support for that tax year or if claiming the child as a dependent would not result in any tax benefit.
Thus, in the absence of agreement, the court had allocated exemptions between the parties based on their percentage income used to calculate child support. Number of overnights with a parent did not determine how the dependency exemption was allocated. Take a common situation, one divorcee works full-time (typically with the kid(s) less than half of the time) and the other works part-time (or less) but has the kid(s) more than half of the time.
Full-time contributes the lion share of the "costs of raising the children," and thus enjoyed the lion share of the dependency exemption. Now that there are no longer dependency exemptions, C.R.S. 14-10-115 (12) has no relevance and having a child "more than half the year" will determine which parent gets the tax breaks associated with dependent children (i.e. filing as Head of Household and the Child Tax Credit).
Change for the "breadwinner."This significant change will really impact the "full-timer" who doesn't have their children for more than half of the time. The impacts are buffered a little by the increase to the Standard Deductions and the Child Tax Credit. The Standard Deductions were nearly doubled in every category: Single was $6,350, now is $12,000; Single Head of Household was $9,350, now is $18,000; and, Joint Return was $12,700, now is $24,000.
The Child Tax Credit was doubled from $1,000 to $2,000, with $1,400 refundable to lower income taxpayers. However, only the parent with the kid(s) more than half the time is eligible to file as Head of Household and receive the Child Tax Credit.