Monday, January 16, 2012

Child Tax Deductions: Who gets them in a Divorce?

On your Federal Income Tax Return you can claim an exemption for each qualifying child, which for the tax year 2011 will result in a $3,700 per dependent credit off of your taxable income.  Depending on your tax bracket this could save you as much as $1,295 in federal taxes.

But if you are separated or divorced and filing separate federal income tax returns, who gets the exemption?

First of all, you can't both take it.  Only one of the parents can use the exemption for each child on their return. If you both claim a child, the IRS will reject your return and send you a letter indicating that you must amend.

So which one of the parents gets to use the exemption?

Pursuant to IRS Publication 501, the IRS considers a child of divorced or separated parents in most cases to be the qualifying child of the custodial parent only.  The IRS defines custodial parent as "the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent."

It doesn't matter if your agreement says you share custody.  If one parent has the child more than 50% of the time, then that parent is the custodial parent as far as the IRS is concerned.  ("If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income (AGI).")

It is possible, though, to transfer the exemption from the "custodial" parent to the "noncustodial" parent.  Some division of this benefit is often negotiated as part of a divorce agreement or ordered by a Judge, to give the noncustodial parent some tax credit in exchange for the child support that they pay from post-tax income.  In the case of one child, the exemption can be alternated from year to year, or when there are multiple children the exemptions can be divided between parents.

In order for this transfer to be allowed by the IRS, certain rules must be complied with.  According to Publication 501, a child can be treated as the qualifying child of the noncustodial parent if four requirements are satisfied:

  1. The parents are divorced or legally separated under a decree of divorce or separate maintenance, the parents are separated under a written separation agreement, or lived apart at all times during the last 6 months of the year, whether or not they are or were married;
  2. The child received over half of his or her support for the year from the parents;
  3. The child is in the custody of one or both parents for more than half of the year; and
  4. The custodial parent signs a written declaration,  Form 8332, that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return. (For cases prior to 2008 this requirement is slightly different and you should review Publication 501 further).

If you have a divorce agreement that states that the non-custodial parent gets the child's tax exemption, then Form 8332 must be completed or the IRS could reject the return.  If the custodial parent refuses to sign Form 8332 then you must file a Complaint for Contempt with the Probate & Family Court.  The IRS will not honor the divorce agreement without a signed form 8332.

Visit our site for more information on how to file a Complaint for Contempt.

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