Custody, Not Support, Determines Exemption

My son is divorced and has joint physical custody of his daughter. His ex-wife only pays $35 a week in child support but wants to claim the daughter on her taxes. What happens if she and my son both claim the exemption for their daughter? He definitely contributes more financially to the child’s welfare than his ex-wife does. M.K., Indianapolis

The IRS won’t like it if both parents claim the child as a dependent. According to Pat Brummer, senior communications specialist at the IRS Public Affairs office, both parents will be questioned about the dependency of the child, in an effort to determine which parent is entitled to the exemption.

“The first thing we’re going to look at is what does the divorce decree say about it.” So much frustration can be averted if people take the time to set out in the decree who will get the tax benefits that relate to the children.

In the absence of the dependency issue being covered in the decree, a determination will be made by the IRS if the parents can’t come to an agreement between themselves.

The tax tug-of-war over who gets to claim the deduction for a child pretty is straightforward. Although the parents in this situation share custody, the child must have lived in the home of one of the parents for more than half of the year. This isn’t difficult to calculate. There were 365 days in 1999. Count the number of days the child spent with one parent. Subtract that number from 365 to figure out how many days the child spent with the other parent. The parent who spent the higher number of days with the child has custody.

When determining who gets to claim the child as a dependent, it doesn’t matter which parent paid more to help with the support of the child. “Custody is the main issue,” Ms. Brummer claims.

It’s still possible for the non-custodial parent to claim the child as a dependent, but the custodial parent must give permission. There is an IRS form for just this situation, Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents.

The parent with primary custody of the child can sign this form, giving the other parent permission to claim the exemption for the child. “You can sign this form for one year or you can sign it forever.” Situations can change, though, and signing this form as a permanent change can be, “a big mistake. Do it year by year if you’re going to do it,” according Ms. Brummer.

Although the arrangement may not seem equitable to your son, it may well be the case that his ex-wife is providing more support for the child than he realizes. The mother paid $35 per week in child support, or $1,820 if she paid for the entire year. In addition, she presumably provided a home, clothing, food, transportation, and may have provided medical costs, school expenses, entertainment, toys, bedroom furnishings, books, and other amounts spent directly for the child. Both parents may be spending more than the other realizes.

It’s surprising how many couples divorce without discussing the tax issues at stake when there are children involved. A standard part of the divorce process should include reaching agreement on who will get to claim the child as a dependent, and this decision should be written into the divorce decree.

Some parents agree to alternate years when claiming dependents, some parents agree that the parent who will have the greatest tax benefit from the exemption will claim the child as a dependent and then make a cash settlement to the other parent when the tax returns are filed. And some parents agree that one of them will take the exemption every year. It doesn’t matter what you agree to do, as long as you agree.

There is a lot at stake here, as I’m sure your son realizes. In addition to the benefit of the exemption on both state and federal tax returns, which is worth around $500 in the lowest income bracket, the person who gets the exemption also gets to claim the $500 Child Tax Credit, each year for as long as the child is under 17 years old.

Attention taxpayers!

Get your tax questions answered in person, so to speak, with Gail Perry, on-line, at www.accountingweb.com, for one hour each Monday night at 7 p.m.

For those of you looking for tax forms this spring, look no further than the web site of yours truly, at www.funwithtaxes.com. All federal and state tax forms are accessible from this web site, as well as the text of previous Fun With Taxes columns, the latest tax news, and links to other tax-related matters.