Taking the Child Tax Credit When Someone Else Claims the Exemption

There has been a lot of confusion about taking the child tax credit for one of your kids when you’re not claiming that child as a dependent. Here’s the deal:

If you’re divorced, and you agree with your ex to let him/her take the dependent exemption for any one of your kids, you’re also implicitly agreeing to let him/her take the child tax credit for that child as well. The one goes with the other… they can’t be separated.

Before you think we’re crazy, take a look at Form 8332, first paragraph under purpose of the form: “If you are custodial parent, you can use this form to release your claim to a dependency exemption for your child. The release of the dependency exemption will also release to the noncustodial parent the child tax credit and the additional child tax credit.”

What’s important to note is that this tied-togetherness applies to the child tax credit, but not to the Earned Income Credit (EIC) or to the Child CARE credit. You can often still get the EIC and the Child Care Credit, so you DO want to enter your child in the dependents section of the TurboTax interview anyway so that you can see if your child qualifies you for those credits.

In TurboTax, when you have this situation, you enter your dependent as Dependent Type “Not a dependent (EIC/Child Care/Child Credit only)“. This is fine, but TurboTax will think you qualify for the very limited special rules for when you CAN take the Child Tax Credit without the dependent exemption unless you do one very important thing: you check the box saying your dependent is NOT a US citizen. We know… that’s not a true statement about your child… but this is the way to force TurboTax NOT to try to take the child tax credit for this child.

If you don’t check this box, TurboTax will say, “hmmm, you want to take the child tax credit for this non-dependent child, so we know you HAVE to file Form 8901 which isn’t in TurboTax” and you get an error message and can’t e-file.  So check the “not a US citizen” box and it’ll be fine… you won’t get an error message.

What’s the deal with this Form 8901 and the rare exceptions? Well, it’s this: there are only two times when you get to take the child tax credit without taking the dependent exemption:

1. When you, or your spouse if you two are married and filing a joint return, can be claimed as

   a dependent on someone else’s 2005 return, OR

2. When your qualifying child himself or herself is married and s/he files a joint return for

   2005 (with rare exceptions).

That’s IT. If either of those situations applies to you and/or your child, you meet a rare exception to the rule that you can’t split up the dependent exemption and the child tax credit for one child. If you do meet the rare exception, you have to file Form 8901 with your return. Form 8901 is titled “Information on Qualifying Children Who Are Not Dependents (For Child Tax Credit Only)” and it’s just a bit misleading. When you read the instructions for Form 8901, it clarifies that you file this form ONLY when the dependency exemption is denied under the two circumstances we describe above.

Clear as mud? We think so as well, and we’ll work to clarify this even more for next year.