Someone asked who gets the tax credit for the daycare? Could they split it? Both parties had good competent counsel, but this one of those finicky tax details that is rarely if ever litigated, and so nobody was quite sure. We got online and looked it up.
The children were in exceptionally good quality care, costing each parent well in excess of the maximum annual credit. They each wanted to keep paying the provider directly, outside of the child support calculation.
Up to 35% of work related daycare expenses can be claimed in this means-tested dollar for tax dollar credit. Because both parents’ incomes were just off the top of the scale, they would be limited to a 20% credit, meaning no more than $1200 per year. Still, with infant twins destined for another decade of needing care, this was a $12,000 issue when looked at over the longer term. Could one or both parents claim this credit?
It turns out that this tax credit is not tied to who gets the federal dependency exemptions. Instead it goes to the custodial parent. “The custodial parent is the parent with whom the child lived for the greater number of nights . If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income.” IRS Publication 503(2014).
This lead to a conversation about whether these 50:50 parents wanted 182.5 overnights each year (credit always goes to the highest earner), or whether they wanted to alternate years on who took the 183rd day out of the usual 365 day-long year (credit to each parent in alternating years). More drafting of language for the parenting plan followed for the lawyers.
I found myself reflecting on the percentage of the $12,000 eaten up by having three paid professionals worry about this. I was thinking present value of money thoughts, as the tax credit would pay out slowly over the next decade.
This tax issue seemed tiny compared to everything else the parents had resolved that day. But then I saw that we had been in somewhat difficult separate-room sessions up to that point. It was late afternoon, and this was the first time that counsel and clients were all together around the same table, and they were calmly treating this as a math problem to be quietly solved through negotiation.
That ending to the day was priceless, and they settled the case with little additional help from me.