12/01/2011

The IRS no longer wishes to wade into the murky waters of divorce, and the tax technicians who open the mail certainly don’t want to read your legal papers, so here is the relatively new edict:  court orders, decrees and separation agreements alone cannot be relied upon to determine which parent may “take the kids” to his or her tax return, with all the goodies that go with those exemptions.   It does not matter what your attorney jots into those papers or what the judge allows or what you negotiate.  In the matter of federal taxation, IRS rulings trump state law.

So what does that mean?  Simply stated – ONLY the custodial parent has the right to claim the exemption and various credits for a qualifying child on his or her tax return.  And the “custodial parent” is defined by the IRS as the one who puts a roof over the child’s head for more nights of the year than the other parent.  The IRS cares not what your decree says.   For tax purposes, there is only one custodial parent – and the other parent is the noncustodial parent.  OK – so what about the strange year (ie perhaps a leap year?) wherein the child spends the night equally with both parents?  Are you ready for this?  The custodial parent is then deemed to be the one with higher adjusted gross income – really (IRC 152(c)(4)(B)).  There is method behind that madness – the one with the higher adjusted gross income may be less likely to claim an earned income credit.  Aha!

Can the noncustodial parent ever claim the exemption for the kids?  YES!!  The custodial parent can relinquish his/her right to claim the child on his/her return by signing a written declaration (best to use Form 8332) promising not to claim the child as a dependent for a given taxable year  or years and the noncustodial parent must attach it to his or her tax return every year the child is claimed on the noncustodial parent’s return.  For an e-filed tax return, Form 8332 gets attached to Form 8453 and mailed to the IRS.  Here is the real rub:  the declaration must be an “unconditional release” of the custodial parent’s claim to the child.  Unconditional means that it cannot be revoked to satisfy ANY condition – such as nonpayment of child support – no matter what your decree says.  Message here:  be very careful what you sign.   If you are the custodial parent and doubt that your ex will continue to send support, you might want to go year by year rather than signing away the right for blocks of years.  Just a thought.  Get advice from your tax professional.  And educate your attorney  :).

You, the custodial parent,  CAN revoke the declaration using Form 8332 Part III – but, as the instructions tell us, “ the revocation will be effective no earlier than the tax year FOLLOWING the year you provide the noncustodial parent with a copy of the revocation or make a reasonable effort to provide the noncustodial parent with a copy of the revocation.”  So – a long time from “now.”  Make sure that you attach a copy of the revocation (Form 8332) to your tax return for each year that YOU are claiming your child as a result of the revocation.  And also keep evidence demonstrating HOW you notified or attempted to notify the noncustodial parent, too.   You may be in for a fight.

Last but not least…even with a release in effect, the custodial parent may still claim head of household filing status, as well as the earned income credit and dependent care credit, if eligible.  The noncustodial parent will receive the dependency exemption and the child tax credit.