Who gets to claim the child on taxes

 

I do not generally practice tax law.  That is to say, I wouldn’t begin to advise anyone of the tax implications of selling some inherited stock and reinvesting those proceeds in farm carbon credits.   It just isn’t my cup of tea.  However, tax law has implications for my clients in a few distinct instances that I keep up with.  First, taxability of judgments or settlements as income.  Second, taxability of confidentiality clauses in releases.  Third, tax consequences of divorce and property settlement agreements.

For my divorce clients, the typical questions involve taxes due to the division of a business, taxability of alimony payments, and which party gets to claim the children for purposes of the dependency exemption.  That brings us to the question of the day.

What if the parties agree and incorporate the following terms in a property settlement agreement:

[I]n 2003, and in odd numbered years thereafter, provided that she is employed and earning income, defendant [Ms. Phillips] shall be entitled to claim the parties’ two younger children, W[] and L[], as dependency exemptions on her income tax returns; and, assuming he is current with his child support payments as of the end of the year, plaintiff [Mr. Shenk] shall be entitled in 2003, and in odd numbered years thereafter, to claim the parties’ oldest son, M[], as a dependency exemption on his income tax returns. In even numbered years, the parties’ entitlement to the foregoing dependency exemptions shall be reversed, with plaintiff having two exemptions and defendant having one, again assuming that defendant is employed and earning income and plaintiff is current with his child support payments at the end of the year in question * * *.

 

The above provision certainly sounds like the parties have considered the benefits of the dependency exemption, but what if both husband and wife later claim the exemption for the same child and there is no Form 8332 (IRS form for “Release of Claim to Exemption for Child of Divorced or Separated Parents)?

According to Shenk v. Commissioner of Internal Reveune, 140 T.C. No. 10 (May 6, 2013), “[U]ltimately it is the Internal Revenue Code and not State court orders that determines one’s eligibility to claim a deduction for Federal income tax purposes…”

An individual is allowed a deduction for an exemption for each individual who is a dependent of the taxpayer for the taxable year.  Section 152(a) defines the term “dependent” to include “a qualifying child”. Generally, a “qualifying child” must: (i) bear a specified relationship to the taxpayer (e.g., be a child of the taxpayer), (ii) have the same principal place of abode as the taxpayer for more than one-half of such taxable year, (iii) meet certain age requirements, (iv) not have provided over one-half of such individual’s support for the taxable year at issue; and (v) not have filed a joint return for that year.

However, in the case of divorced parents special rules determine which parent may claim a dependency exemption deduction for a child.  Pursuant to section 152(e), when the following criteria are met, a child may be treated as a qualifying child of the noncustodial parent rather than of the custodial parent:

•  The “child receives over one-half of the child’s support during the calendar year from the child’s parents * * * who are divorced * * * under a decree of divorce”, sec. 152(e)(1)(A);
• such child was “in the custody of 1 or both of the child’s parents for more than one-half of the calendar year”, sec. 152(e)(1)(B);
• “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”, sec. 152(e)(2)(A); and
• “the noncustodial parent attaches such written declaration to the noncustodial parent’s return” for the appropriate taxable year, sec. 152(e)(2)(B).

The father in the Shenk v. Commissioner case above didn’t have a signed declaration so he certainly couldn’t attach it to his return.  As a result, the IRS disallowed the dependency exemption deduction and the child tax credit.  Then, because he didn’t have a qualifying child, his head of household status was disallowed as well.  If you enjoy reading Tax Court opinions, be my guest.  However, the 17 page Shenk opinion can be reduced to a single CliffsNotes styled practice pointer:

If a divorce case involves children, include a provision within the property settlement agreement that requires the appropriate party to execute and submit to the other party IRS Form 8332 on or before January 15 of each and every year.

On a related note, if a divorce case involving children does not resolve by agreement make certain that the judgment entered by the Court adequately addresses the dependency exemption and requires timely submission of IRS form 8332.  If not, a post trial motion should be filed.

You can find Form 8332 here.