It is a little-known fact that in the event of “exactly equal” parenting, the tax law considers the higher-income parent as custodial. Although it looks fair to agree on “exactly equal,” it is not.
Avoid the “Equal Parenting” Tax Trap
To avoid this situation, specify in your separation / marital agreement that the lower-income parent is custodial for 183 overnights, and the higher-income parent is custodial for 182 overnights.
This allows you, rather than the IRS, to decide who is the custodial parent for tax planning. This language need not control Child Support calculations. If child support will be different with 183/182 than with 182.5/182.5, you can calculate child support with 182.5, but still specify 183/182 in the separation / marital agreement.
Do Not let the IRS Dictate Your Child Custody Status
If the parties to a marital agreement have agreed to exactly equal parenting, and the lower-income parent pays the childcare expense, neither parent would be eligible to claim the childcare credit.
1. First, the lower-income parent would be denied the ability to claim head of household filing status. The parties may have been counting on one being head of household, and the surprise tax determination that this party is not the custodial parent changes this.
2. Second, to claim the Child Care Credit, a party must provide the child’s home for more than half the year. That is, the party must be the custodial parent for this purpose. Control Your Own Tax Determination for the Custodial Parent
When you specify in your separation / marital agreement that the lower-income parent is custodial for 183 overnights, and the higher-income parent is custodial for 182 overnights, you will have stepped out of the IRS mandate, because you will not have exactly equal parenting, and the IRS will not be able to decide who is the custodial parent.
Otherwise, if the parties have specified “exactly equal” parenting in their agreement, and the lower income parent pays the childcare expense, the result would be that neither parent would be eligible to claim the Child Care Credit. The higher-income parent could not claim because they did not make the expenditures. The lower income parent could not claim because they were not custodian.
Under the provisions of the American Rescue Plan, this is especially important.
The maximum Child Care Credit is now $8,000 for 2021 only. This is almost four time what it was in 2020. After 2021, the Credit reverts to pre-2021 maximum ($2,100). In addition, for 2021, the Child Care Credit is fully refundable, so almost everyone benefits. (Some very-high income taxpayers are completely phased out and get no credit.)