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The Dependency Exemption and ObamaCare

Child SupportAs most parents know, the Internal Revenue Service (IRS) allows parents of dependent children to claim a percentage of their income as exempt from taxes. Separated or divorce parents will usually both want this exemption for themselves, as it can be quite valuable (the exemption was $3,950 per child in 2014). As a child can only be claimed on one tax return per year, a common question in child support cases is who will get the tax dependency exemption each year for each minor child.

According to IRS regulations, the custodial parent is the party entitled to claim the tax exemption for each child. A custodial parent for these purposes is the parent with whom the child resides more than half the time. If the parents have 50/50 custody of a child, resulting in neither party being the “custodial parent,” then the parent with the higher gross income is entitled to the exemption—as the higher a parent’s tax rate is, the more valuable the exemption will be.

Although the IRS has a guideline with regard to who can claim the child, parties are able to agree that the non-custodial parent (the parent who has the child for less than half of the time) will have the right to claim the exemption. This agreement can be materialized by the non-claiming parent executing IRS Form 8332 which releases their right to claim the child for a given year. If there is more than one child, this form will need to be completed for each child. It is important to know that this form is only good for one tax year, meaning that the parties can agree to alternate who claims a child each tax year. In the event the parties are unable to agree who claims the child, Virginia law also allows a judge presiding over a child support hearing to grant the exemption to either party.

It is important to know that along with the benefit of the dependency exemption also comes a potential liability. Under the Affordable Care Act (the “ACA,” more commonly known as “ObamaCare“), individuals are required to obtain and maintain insurance for themselves and their dependent children. If a party does not comply with this requirement they can face financial penalty. For the purposes of the ACA, the parent claiming a dependency exemption for a child is the parent who is liable for obtaining and maintaining health insurance for that child for the year associated with the claimed exemption. This is irrespective of a child support order mandating that a particular party maintain health insurance coverage. The failure of the party claiming the tax benefit to maintain health insurance for a child, irrespective of fault, could be financially penalized under ObamaCare.

Example: a child support order entitles Amy to claim the dependency exemption for her son Brice, while also requiring Brice’s dad Corey to maintain health insurance for Brice. However, Corey violates the order by failing to maintain health insurance for Brice. Amy, not Corey, would be penalized by the IRS for Corey’s failure to maintain health insurance for their son. In this situation, Amy’s only avenue for relief would be to file a motion with the court to force Corey to comply with the order, and provide insurance for Brice. However, she would still be the one “on the hook” with the IRS.

Livesay & Myers, P.C. has teams of experienced family lawyers in Ashburn, Manassas, Fredericksburg and Fairfax, Virginia. If you are facing a child support or other family law case in Northern Virginia, contact us to schedule a consultation today.