Under current IRS rules, when parents are married, both parents will be able to claim their children as dependents on their joint return.
A further benefit available is that when you claim your child as a dependent, you may be able to claim the child tax credit for the child (up to $1,000).
When you separate or divorce, however, only one of you can claim the child as a dependent exemption.
In some cases, both parents will claim the child on their taxes. You should avoid this at all costs because the IRS will easily cross-reference your child’s Social Security number to make certain both parents are not taking the deduction.
So who can and should take the deduction?
A common and important tactic to increase support is to try to maximize the total income available for the divorcing couple. That way, there will be more total money available for the paying spouse to actually pay support. Certainly, by maximizing the total income available for the divorcing couple, everyone will make out better—the spouse paying support and the spouse who is receiving support.
To maximize your income, it makes sense that the divorcing couple should do their best to lower their tax bill, giving them more funds available for support. One way to lower your tax bill is by taking advantage of the exemption the Internal Revenue Service (IRS) allows you to take for each of your children.
Unfortunately, as long as you file an individual tax return, and not a joint return with your spouse, only one of you can take the exemption. Generally, the IRS will only allow the custodial parent to take the deduction. For you to claim your child as a dependent on your tax return (and take the exemption), you must provide at least half of the child’s financial support during the tax year.
As we will see, however, the deduction can be used to maximize the income available for the divorcing couple by shifting it to either spouse.
Who can claim the child as a dependent for tax purposes?
Simply stated, the parent who spends more than half of the year with the child will be able to claim the child as an exemption on their taxes. There are certain situations, however, in which the noncustodial parent will be able to take the deduction for the child.
You can claim the child as a dependent if your child is 18 years old or younger by December 31st of the year or is 23 or younger if they are a full-time student. In addition, the child must also receive at least half of their support from the parent claiming the deduction.
Even if your child is over 18, you can still claim your child as a dependent if they have less than $4,000 in gross income and you’re providing more than half of the support for the adult child. You can consider the free rent you provide for your child when they live at home.
But in most situations, the custodial parent will claim the child as a dependent on their taxes. If you and your spouse do not agree about the tax deduction or the court does not make any orders, then only the custodial parent can claim the child as a dependent on their taxes.
You should make note of the fact that the IRS has made clear that only the parent having custody of the child for the majority of the year– the one the child spends more than half the year with – will be able to take the tax deduction.
On the other hand, the noncustodial parent may take the deduction in two situations:
- The custodial parent agrees to give the deduction to the noncustodial parent;
- The court orders that the noncustodial parent can claim the child for tax purposes.
As we will see, there may be certain conditions that the court will attach for the exemption to be passed along to the noncustodial spouse.
Why give away the exemption?
Basically, the exemption may be worth a lot to the noncustodial parent and may be virtually useless to the custodial parent. Usually this would happen when the noncustodial parent makes a lot more than the custodial parent. The parent with the higher income will be able to use a deduction to lower their after tax income and put more money in their pocket.
As a result, the more money they have, the more income will be available for support.
By giving away the exemption, the overall after tax income of both parents can be increased and the support to be paid to the custodial parent will also be increased. Therefore, the custodial parent is giving away something with little or no value for them and receiving a tremendous benefit—more in income available for support.
It is especially useful to give away the exemption when the custodial parent doesn’t have any income. In that case, the custodial parent won’t have any need or ability to use the dependency exemption ( or child tax credit).
How do I release the exemption so the noncustodial parent claims child on taxes?
IRS Code Section 152 (e)(2) allows you to release the exemption. The Section states:
(2) Exception where custodial parent releases claim to exemption for the year
For purposes of paragraph (1), the requirements described in this paragraph are met with respect to any calendar year if—
(A) the custodial parent signs a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year, and
(B) the noncustodial parent attaches such written declaration to the noncustodial parent’s return for the taxable year beginning during such calendar year.
As a result, the IRS clearly allows a parent to giveaway or receive the dependency exemption.
As you can see from Section 152 (e) the custodial parent can give the exemption to the noncustodial parent if the custodial parent signs a written declaration relinquishing the right to claim the child as a dependent and the noncustodial parent attaches the declaration to their tax return.
Fortunately, the IRS has provided us with a form to use for the written declaration. It is Form 8332 Release of Claim to Exemption for Child of Divorced or Separated Parents. You can and should use the Form instead of making one up from scratch. In every case then, the custodial parent will sign Form 8332 and provide it to the noncustodial parent so that they can attach it to their tax return.
As such, the noncustodial parent would attach Form 8332 to their return for every year they claim the child as a dependent.
By using Form 8332, the custodial parent can give away the child’s exemption for as many years as the parents agree the exemption should be released.
So what should you do if the custodial parent refuses to sign Form 8332? There are two things you can do:
- You can attach part of your divorce judgment to your tax return to prove that you are able to take the exemption; or
- You can request your judge to order the custodial parent to sign Form 8332. In most cases, the court will usually only allow the noncustodial parent to claim the deduction if that parent is up to date on their child support payments.
At any time, the custodial parent can revoke Form 8332 and reclaim the child as a dependent for their tax return.
What Happens When Both Parents Claim a Child on a Tax Return?
We have witnessed situations where both parents have mistakenly claimed the child as a dependent on their taxes. If the divorcing couple files separate tax returns, the IRS will not let you do that. You must fix your mistake by filing an amended tax return.
Fortunately, the IRS will allow you to amend your tax return within three years of filing the original or within two years of paying the relevant tax, whichever is later. If you amend your return, because you have eliminated the deduction, you may be required to send more money to the IRS for that tax year.
Also, you could be required to pay penalties and interest for the underpayment.
If you choose not to amend your return, the IRS could find out that you and the other parent have both claimed the same child as a dependent. The IRS will have 3 years to go back and perform an audit on a tax return you have submitted. If you are audited, you must prove either that your child lives with you or that the other parent signed Form 8332.
Even if the IRS doesn’t discover the mistake in 3 years, they could claim that you willfully tried to evade taxes which would allow them to open up any previous year’s tax return for an audit.
Be sure to consult with an experienced Orange County divorce attorney or with your tax advisor before making any tax decisions.