Effect of “Obamacare” on Tax Dependency Exemption and Required Medical Care for Separated Parents
Parents frequently complain about how their children do nothing but cost them money. However, when it comes to taxes, children can actually save their parents some money. Parents are able to receive certain tax deductions for medical care provided to their dependent child as well as receiving certain personal exemptions for each individual they claim as a dependent. This has the potential to save parents thousands of dollars on their tax returns, since the exemption will reduce their taxable income by a fixed amount. For 2016, the deduction amount ranges up to $4,050 for each exemption claimed.
For parents that are together and file their taxes jointly, there is no controversy as far as the dependency exemptions and deductions are concerned, as their child is seen as the dependent of both of them. When parents are separated or divorced, this becomes a bigger issue since only one parent can claim a child as a dependent for tax purposes. Since child support payments are not deductible or taxable, being able to claim a child as a dependent has important tax implications in regards to parents and the care they provide to their dependent child.
Typically, the tax dependency exemption is allocated in any establishment or modification of a child support order. The court can also award the exemption to the parent for whom the award would serve to further the child’s best interest. ORC 3119.82 sets forth certain factors that the court should consider when determining how to allocate the tax dependency exemption. These factors include, net tax savings, the relative financial circumstances of the parents and children, the amount of time the children spend with each parent, and the eligibility of either or both parents for the federal earned income tax credit, or other state or federal tax credit.
The custodial parent of the child often will be the one awarded the exemption. However, a custodial parent can complete IRS form 8332, which will release the custodial parent’s claim to an exemption for their child if required to do so by the court. Some courts have also worked out agreements that allow the separated parents to each claim the child as a dependent in alternating years. For example, one parent will claim the child as a dependent in odd numbered years, and the other parent will claim the child as a dependent in even numbered years. In the case of multiple children, parents may opt to each claim one child as a dependent.
Tax Dependency Exemption Claim
Under Ohio law, the court will also require that one or both parents provide for the health care needs of the child in any child support proceeding. Health care is defined under Ohio law as medical support that includes coverage under a health insurance plan, payment of costs of premiums, co-payments, and deductibles, or payment for medical expenses incurred on behalf of the child. If one parent provides medical care that exceeds the amount required under the support order, the cost is usually pro-rated between the parents so that it is shared in proportion to the parents’ income. Private insurance is usually the method stipulated in agreements to cover medical costs of the child, but if a party required to provide care does not have private insurance, a cash medical support payment may be ordered to supplement the original monthly child support amount.
In 2010, this area of the law was impacted with the passing of the Patient Protection and Affordable Care Act, more popularly known as “Obamacare”. Under 26 USC 5000A, “an applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual, who is an applicable individual, is covered under minimum essential coverage for such month.” Thus, under that law, if a parent claims a child as a dependent, they become required by law to provide “minimum essential coverage” for the dependent child. It is required that you report minimum essential coverage on your federal income taxes for each month you or your claimed dependent had coverage.
For any month that a parent does not maintain minimum essential coverage for a dependent, that parent will need to make an Individual Shared Responsibility Payment with their tax return. This payment serves as a penalty for not maintaining minimum essential coverage for you or for a dependent. According to the IRS, the payment amount is either a percentage of your income or a flat dollar amount, whichever is greater. From the IRS website, you will owe 1/12th of the annual payment for each month you (or your dependents) do not have coverage and are not exempt. The flat fee for not having insurance in 2016 is $695 per adult and $347.50 per child (with a maximum amount of $2,085 for a family), or 2.5% of your household income, whichever amount is greater. However, if you went without coverage for less than three consecutive months during the year you may qualify for the short coverage gap exemption and will not have to make a payment for those months if you provide coverage for at least one day of the third month. You are only allowed on short coverage gap exemption per year.
Child Support Provision Needed To Avoid Obamacare Tax Penalty
While under the law a parent claiming a child as a dependent must ensure that a dependent receives required medical care, in the court system, providing medical care does not automatically equal getting to claim a tax exemption. Thus, a problem can arise if the court orders the one parent to pay for the cost of medical insurance while allowing the other to claim the child as a dependent. According to the IRS, Section 5000A places liability for a dependent’s lack of minimum essential coverage on the taxpayer who may claim the individual as a dependent regardless of whether the taxpayer actually claims the individual as a dependent for the taxable year. Section 5000A does not provide that this liability may be assigned to another taxpayer, even if the other taxpayer has a legal obligation to provide the child’s health care. Thus, if one parent has not complied with a court order and has failed to provide the required medical care, the parent claiming the deduction for the children will still be liable for payment of the penalty. Also, if no one claims the child for tax purposes, the custodial parent will have to pay the tax penalty.
This is a potential problem area when it comes to domestic relations practice. It is important for attorneys to keep this issue in mind when negotiating a child support agreement. It may be a good idea to include a provision in the agreement delegating the responsibility to file proof of insurance to the IRS from the parent providing health insurance and/or a damages clause to indemnify a party for the cost of the penalty if the other parent fails to provide insurance or proof of minimum essential coverage when required by court order to do so. It could also be argued that such a clause could be invalidated since Section 5000A does not provide for the assignment of penalty liability. This could necessitate an attorney to look for other avenues in a support agreement to insulate a client from the possibility of a tax penalty for the other party’s non-compliance. It is also possible that a parent who is required to provide medical care and fails to do so will be held in contempt of court for violating a court order. It seems clear that further clarification or adjudication is needed on this matter. Yet surprisingly, there has yet to be a case addressing the “individual shared responsibility payment”.
I want to thank law extern Matthew Kimmel for his assistance in researching and writing this article about the tax dependency exemption!
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Robert L. Mues
Robert Mues is the managing partner of Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has received the highest rating from the Martindale-Hubbell Peer Review for Ethical Standards and Legal Ability. Mr. Mues is also a founding member of the "International Academy of Attorneys for Divorce over 50" blog.