Arm Wrestling Over The Dependency Exemption?

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Fox Rothschild LLP

There are still things to discover about the 2017 Tax Reform passed by Congress late in that year.  The bar and the accounting community have spilled lots of ink over the changes to the law affecting alimony and many other lesser issues.  One of those issues is the temporary disappearance of the longstanding dependency deduction/exemption.  It still goes to the parent with primary custody unless there is an agreement otherwise.  Nevertheless, until 2025, the “deduction” has been effectively gutted.  In 2018, it was supposed to be $4,150 per dependent.

Therefore, the value of the “dependent” is now measured largely in the power it provides to move from a single taxpayer to a head of household.  This also used to mean a somewhat meaningful reduction in income tax rates.

We were recently asked to evaluate whether the “status” of household head was worth quarreling over.  We ran numbers at $160,000 in taxable income and at $518,000.  What we were surprised to learn was that the tax difference was largely inconsequential.  At the top bracket, the tax savings were $1,442.  At $160,000, it was $1,426.  Not nothing, but a far cry from olden days when three children brought $12,000 in taxable income reduction and $2,723 in tax savings at $160,000.  It is conceded that the standard deduction has increased.   However, the fight over who claims the kids just doesn’t have the same pizazz it did in 2017.  At least for now.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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