For many divorcing parents, the dependency exemption is a high-stakes issue because the parent who claims one or more exemptions can realize substantial tax savings. For 2011, the exemption is $3,700 per dependent child. Also, the parent who is entitled to claim the dependency exemption may be eligible for various other tax benefits, such as the child tax credit, child and dependent care credit, and earned income tax credit.
How it works
In the eyes of the IRS, the custodial parent generally is entitled to claim the dependency exemption on his or her federal income tax return. In determining which parent is the custodial parent, the IRS normally considers the number of nights the child lives with each parent during the year. The parent who has custody of the child for the greater number of nights gets the dependency exemption. If the child stays an equal number of nights at each parent's residence during the year, the IRS awards the dependency exemption to the parent with the higher adjusted gross income. Note that the IRS looks at the number of nights, not days, that the parent has custody. This can come as a surprise to a parent whose custody arrangement allows him or her to spend a few hours with the child each day after school before dropping the child off at the other parent's house for the night.
How the exemption claim can be released
If desired, the custodial parent may waive the right to claim the dependency exemption for the current tax year, specific future years, or all future years. Few custodial parents choose to do so, but there are times when this makes sense. For example, if the noncustodial custodial parent has a higher income, he or she may realize a larger tax benefit by claiming the exemption. Instead of letting all or part of the dependency exemption go unclaimed, the custodial parent may agree to waive the right to claim the exemption in exchange for something of value, such as increased child support. The custodial parent must waive the exemption claim in writing on IRS Form 8332, which is available for download on the IRS website. To claim the exemption, the noncustodial parent must attach the form, signed by the custodial parent, to his or her tax return. The form must be attached to the return for each year the noncustodial parent claims the exemption.
What divorce decrees say about the exemption
If the divorce decree mentions the dependency exemption, the court usually awards it to the custodial parent. When multiple children are involved, the situation can be more complicated. On agreement of the parties, the court may give the dependency exemptions for all children to one parent. If there is an even number of children, the court may award the exemptions for half the children to the custodial parent and the remaining exemptions to the noncustodial parent. If there is an uneven number of children, the court may award the majority of the dependency exemptions to the custodial parent and the rest to the noncustodial parent. If one child is much younger than another, the court may give the exemption for the younger child to the custodial parent so that he or she can claim it for a longer period of time. The scenarios are virtually endless.
What if the decree awards the exemption to the noncustodial parent?
Often, one or both sides use the dependency exemption as a bargaining chip to get what they want in the divorce. When this happens, the custodial parent typically assumes that he or she is legally obligated to forfeit any dependency exemptions that the court awards to the noncustodial parent in the divorce decree. This is a common, and often expensive, misconception. Because federal law supersedes state law, the IRS ultimately decides which parent claims the dependency exemption. No matter what the divorce decree says, the noncustodial parent cannot properly claim a dependency exemption unless he or she attaches the signed Form 8332 to his or her tax return documenting the custodial parent's written consent. Attaching a copy of the divorce decree to the return is not an acceptable substitute. If Form 8332 is not attached to the noncustodial parent's tax return, the IRS ultimately will deny the dependency deduction. So for tax purposes, the divorce decree is virtually irrelevant.
How to revoke the release of a claim to exemption
If the custodial parent releases the dependency exemption claim to the noncustodial parent, he or she is free to revoke the release anytime and begin claiming the dependency exemption. This also is done on Form 8332. The revocation can be for specific future years or all future years. The custodial parent must attach Form 8332 to his or her tax return for each year the exemption is claimed. The revocation is effective no sooner than the tax year following the year in which the custodial parent provides the noncustodial parent a copy of the Form 8332 revoking the release of claim, or makes a reasonable attempt to do so.
Why it is important to seek tax and financial advice
The question of who is entitled to claim the dependency deduction is just one of many critical tax and financial issues facing people who are going through a divorce. Unfortunately, few attorneys or judges are trained to give proper consideration to these matters. Therefore, it is imperative that anyone seeking a divorce consult with his or her tax or financial adviser. The potential benefits are worth far more than the cost.
This legal guide should not be construed as formal legal advice or the formation of a lawyer/client relationship.
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