The Tax Man Cometh
Understanding tax rights for dependent children in custody actions.
One of the most common, yet confusing, issues I deal with, is who gets to claim the child on their taxes after the custody has been settled. When parents are dealing with custody issues, often the furthest thing from their minds is how it will affect their tax status. But if you want to avoid serious tax penalties, or reap significant tax benefits, it’s better to figure it out sooner than later.
Under federal guidelines the dependency exemption cannot be split. Generally, the custodial parent is treated as the parent who provided more than half of the child’s support. This parent is usually allowed to claim the exemption for the child if the other exemption tests are met. However, the noncustodial parent may be treated as the parent who provided more than half of the child’s support if certain conditions are met.
However, IRS Publication 504 covers who may claim a dependency exemption, and how, following a divorce or separation. Regardless of what the custody orders the court has issued, federal law determines your federal tax status. Therefore, the IRS requirements supersede a county or state court order.
The custodial parent can sign a Form 8332 Release of Claim to Exemption for Child of Divorced or Separated Parents, or a substantially similar statement, and provide it to the noncustodial parent who attaches it to his or her return. Please beware that if the custodial parent releases the exception, the custodial parent may not claim the Child Tax Credit.
In a case in which the right to claim the child isn’t clear the IRS employs the following tiebreakers:
If only one of you is the child’s parent, the child is treated as the qualifying child of the parent;
If you do not file a joint return together but both of you claim the child as a qualifying child, the IRS will choose the parent with whom the child lived for the longer period of time during the year. If the child lived with both of you for the same amount of time, the IRS will choose the parent who had the higher adjusted gross income (AGI) for the year;
If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year;
If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year.