Fool.com: Dependency Exemption for Children of Divorced Parents
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Dependency Exemption for Children of Divorced Parents

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By Roy Lewis

I have been asked a number of questions regarding the dependent status of children of divorced parents. Let's take a closer look at this issue.

Current Rules

Before we begin, you should note that neither parent is entitled to the exemption unless both provide, between them, more than 50% of the child's support for the year. Support, for this purpose, should include the value of any housing (or other items) that the parents provide.

Assuming the parents combine to meet this support test (and all of the other required support tests are otherwise met), the exemption goes to the parent having custody of the child, unless the custodial parent releases his or her claim to the exemption. The comparative amount of support provided by each parent isn't relevant. Nor is the amount of any child support paid.

Essentially, therefore, the parents can decide between themselves who will claim the exemption. This issue is often negotiated between the parents, and made part of the divorce or separation agreement. The exemption can alternate between the parents on a year-by-year basis, if they like.

For these purposes, if each parent has custody for part of the year, the custodial parent is considered to be the one who has custody for the greater portion of the year. Many of you live in states that institute what is known as "joint custody," and assume that you are considered to have the child 50% of the time each. This is not true for tax purposes. While your divorce decree might mandate "joint custody," the dependency exemption will go to the parent with the greater physical custody for the year.

It should also be pointed out that the custody rules apply where parents have lived apart (different residences) at all times during the last six months of the year, even if they aren't formally divorced and haven't entered into a written separation agreement.

Exemption Release

A few paragraphs back, I said that the custodial parent can "release" the dependency exemption to the non-custodial parent. That release can be executed (a) on an annual basis, or (b) for one or more future years (e.g., for alternate years), or (c) for all future years.

In many cases, the custodial parent is receiving child support or alimony payments from the other parent. The custodial parent might prefer granting the release only on an annual basis so he or she can refuse to do so if the other parent is delinquent. The custodial parent should make the release on Form 8332. The completed form must be attached to the non-custodial parent's tax return each year the non-custodial parent claims the exemption for the child.

Tax Planning Point: Purely from a tax standpoint, it makes sense to arrange for the parent who will save more tax from the exemption to be allowed to claim it. Then, the tax savings from the exemption can be shared. Of course, where relations are strained, it might be difficult to coordinate such planning, but there are a number of tax issues such as this that should be addressed in a divorce situation.

Pre-1985 Rules

Please note the above rules only apply to post-1984 divorces and separations. If your divorce took place before 1985, you might be living (and planning) under a completely different set of rules.

For pre-1985 split-ups, the non-custodial parent receives the exemption if the divorce decree or agreement says he or she should, as long as he or she contributes at least $600 in support of the child.

So, it is very possible that a long-time divorced person could be operating under completely separate dependency exemption rules than a more-recently divorced person. But, remember that the federal law regarding the exemption deduction controls, regardless of what state law has to say about child support, custody, and visitation rights.

Finally, remember to include the Social Security number of the children on your return. There's no exemption without it. Omitting the Social Security numbers while still claiming the exemptions will result in a summary assessment of tax liability against you.

End Notes

As difficult as it might be to understand, divorce is as much an economic issue as it is a personal and emotional issue. This is only one small portion of the tax considerations that must be reviewed during the divorce negotiations. There are many other even more complex issues that can impact you during a divorce. Make sure that your professional representatives, either legal or tax, have knowledge of divorce tax issues and advise you to act accordingly.
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