Dependency Exemption Basics for Divorcing Parents

April is around the corner, and with it comes tax season.  Clients often have questions as to the tax treatment of children of divorcing or divorced parents. Let’s deal with the most basic, the “dependency exemption”. According to the IRS, the parent who has custody of his or her child for more than one-half the year can claim the child provided that he or she  has provided more than half of the child’s support for the year in question.

In  some cases, however, the non-custodial parent can claim the child. In order to be eligible to do so, four requirements must be met:

• First, the parents must either (1) be divorced or legally separated under a written agreement or (2) have lived apart continuously for the last six months of the year;
• Second, the child must have received more than half of his or her support from the non-custodial parent for the year;
• Third,  the child must have been in the custody of either or both parents for the greater part of the year; and
• Fourth, the custodial parent must release the claim to the dependency exemption to the non-custodial parent in writing (using IRS Form 8332.) This form  must be attached to the non-custodial parent’s tax return.

In many divorce cases, a non-custodial parent’s right to claim the exemption is established by court order or written into the Marital Settlement Agreement. The dependency exemption can be a bargaining chip in negotiations because it  is worth more to the parent earning a higher income. Assuming the non-custodial parent receives the exemption, the next question is whether it should be annually or perennially. Generally, the custodial parent should not waive the exemption for more than one year at a time.   Agreeing to do waive the exemption each year should be tied to a provision in the Agreement or Order requiring the non-custodial parent to be current in child support.

Since no two cases are alike, a parent going through a divorce should always consult with a knowledgeable family lawyer to determine what is in his or her best interests in terms of settlement or trial.

Adapted from John S. Eory’s New Jersey Family Law Blog

Tagged as: "dependency exemption", dissolution, divorce, Family Law, finances, taxes