I have two children. During first 7 months of 2005 I was CP and I paid for daycare for both kids. During last five months, Dad was CP and paid for daycare. Custody Order states we each get to claim one child as dependent. But, we each have dependent care expenses (daycare) for both children. I'm afraid I can't claim my expenses for both kids because I can only claim one as a dependent, therefore I only have one qualifying child. I assume he can't claim both either. It looks like each of us are out the expense we paid for one child. At the time, I fully expected to win our custody battle and I took advantage of the Dependent care account at work. My W2 shows these deductions and my daycare shows that I paid it. Is it wrong to list both children on my form 2441? How can I get credit for the expenses I paid when I was the CP? Now that the IRS recognizes divorce decree's, it doesn't consider me the CP even though I had the children for more than half the year.

That's what it looks llike. You're are considered the custodial parent, but the divorce decree gives that right to your ex-husband.
Pub 503 says that even if you cannot claim the child as a dependent, since you were the CP and the child lived with you over 1/2 the year, you should be able to claim expenses - unless the NCP is entitled to the claim. You may have to come to an agreement with your ex about splitting expenses. Pub 501 says he gets to claim all bebfits of having a qualifying child.

Good Mama:

Claim all of the child care expenses on Form 2441. Since you were the custodial parent for more than 7 months of the year, you meet the criteria specified on Form 2441 for filing the Child Care Credit as Head of Household. However, you can only list the one child whom you claim as a dependent on Line 2.

Now, when you fill in Part III of Form 2441, transfer the amount from Box 10 of your W-2 to Line 28. This amount is capped at $5,000 (by law) for two or more children.

You will get no additional child care credit on you 2005 tax return because you can only claim one child as a dependent due to the $3,000 cap per child, but, In my opinion, you will be able to use up all of Dependent Care Salary Reduction (up to $5,000) because you set that amount based on your good faith estimate at the time.

If you have not already done so, adjust your Dependent Care Salary Reduction down to $3,000 for 2006 to account for the fact that you can only claim one child as a dependent.

Finally, though the divorce decree clearly states you and your husband are entitled to each claim a child as a dependent, you may want to coordinate your tax returns to determine who would most benefit by claiming both children, then have the parent who would benefit the most (if that is the case) claim both children and reimburse the other parent for the lost revenue on their tax refund. That way, it is a win-win situation. This case ferquently occurs when there is a wide disparity in income between the two parents.

I don't understand about adjusting my DepCareSalary Reduction to $3,000. What happened is that when he took custody, I cancelled all further deductions. I am not enrolled at all for 2006 because I don't have care expenses. Are you saying I should be claiming the cost he pays in 2006 for my dependent?

Also, he won't work w/me on coordinating returns to maximize benefits. He is very adversarial & neither of us trust the other. Our incomes are within 5K of each other.

Is it possible (if he is willing) to exchange information (amt spent, daycare tax id) for each child so each of us claims a full year on one child even if it was the other parent who spent the money?

Good Mama:

No, I am not saying you should claim his expenses. You can coordinate with him to claim expenses for the child you claim as a dependent, as long as the amount claim does not exceed what you actually spent. To claim more than what was spent is illegal.

I am sorry to hear that you cannot work with your ex, but I am not surprised. I have been involved in the divorces of several of my clients, and they do tend to get ugly. However, if you do not trust each other, you may be able to trust the tax preparer who prepares both of your returns. He/she can act as an honest broker who will do what is best for both of you. It does not always work, but I have actually done it (and am doing it this year for two divorced couples), so I know it is possible. BTW, since your income is within 5K of each other, it is unlikely that having one parent claim both children will make any difference in taxes paid.

Atlanta Tax Expert,

You said, "Go ahead and claim all of the child care expenses on Form 2441."
Both children's daycare expenses combined are $3244. You say I should list my one qualifying child and then put the total of $3244 on that line. Correct?

You said, "You will get no additional child care credit". Are you referring to line 28 on form 2441? I only get $3000 there. I do get the $1000 child tax credit from line 52 on my 1040, right?

Now let me argue for a moment... In the form2441 dependent care instructions it has Special Rules for children of Divorced... Parents on page one. They say that even if you cannot claim a child as a dependent (true for one of my kids), she is treated as your qualifying person if:
1) children are under 13 - YES
2) You were the child's Custodial Parent (child lived w/you greater part of 2005) - YES (but now Divorce Decree says he is CP)
3) The NCP (me?) parent is entitled to claim the child as a dependent under the special rules for a child of divorced parents. - YES

If this special rule applies, the NCP cannot treat the child as a qualifying person.
Now, to me that says that HE cannot claim his one dependent as a qualifying child, but I get to claim both. I don't want to loose any credit I can get. If I can claim $6000 on line 28 of form 2441 instead of $3000 it will reduce my taxes by $600.

GoodMama:

The ABSOLUTE MOST you can claim is the $3,244 that you paid. Remember that the day care center files an information return with the IRS which validates what you paid them. The IRS will not get upset if the number do not match exactly, but they will investigate if you claim $6,000 and the day care center figure is only $3,244.

For one child, the most you can claim is $3,000. If you paid $3,244 for both children, then claim both children as long as your husband does not claim anything for child care costs.

The rules are designed to prevent divorced parents from both claiming the same expenses.

HELP!!
I efiled my taxes. I just received notice that my return is rejected due to someone else (my ex) claiming my dependent's SS number. I know you just told me we can't both claim the same expenses. I had no way of knowing he would do this. I have the right to claim this child as my dependent and he claims the other child. Don't I get to claim my childcare expenses for that child? Even if he claims childcare expenses for the five months he had the child this year, our expenses aren't the same.
What do I do now?

GoodMama:

Contact the IRS and explain the situation. You will probably have to file the return by regular mail.

Thank you VERY, VERY much for that last advice. I spent an hour on the phone with a helpful IRS employee. I will have to file by mail, but I learned that I DO get to claim both children for dependent care expenses, he does not. I also get to file as Head of Household, he does not. It will take a while for me to get my refund. They will send us both a letter, and then make a determination. He will have to amend his return, pay back the money along with penalties. At last, SOMETHING goes my way!

Glad to help!