When parents divorce or were never married, the general rule is that the custodial parent (whichever parent has more overnights during a calendar year) claims the child as an exemption on his/her tax return. The other parent is the noncustodial parent. If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income.
Parents can also allocate the exemption by agreement by executing and filing IRS form 8332 “Release/ Revocation of Release of Claim to Exemption for Child by Custodial Parent.” There are additional rules for divorced or separated parents set forth in IRS Form 8332 and IRS Publication 501.
When divorced or separated parents do not agree as to who gets the exemption, the state court presiding over the divorce or parentage matter has jurisdiction to allocate dependency exemptions to noncustodial parents by ordering the custodial parent to execute the waiver, IRS Form 8332.. Monterey County v. Cornejo (1991). In upholding challenges to such state court orders, Courts have noted practical consideration in favor of states retaining discretion to allocate the exemption. One significant reason is that income tax exemptions have generally been valuable only to persons with income, and up to a certain point, the higher the income the more valuable exemptions become because of the progressivity of the federal income tax. In cases where the noncustodial parent has a substantially higher income, the purpose of awarding the exemption to the noncustodial parent is to increase the after-tax spendable income of the family as a whole, which may then be channeled into child support or other payments. (see Nichols v. Tedder (Miss. 1989)).
The new federal tax laws effective 2018 through 2025 eliminated personal and dependent exemptions. This changes the prior effect of increasing the after-tax spendable income of the family as a whole. Elimination of the personal and dependent exemptions in 2018 was offset by higher child tax credits. As a result, the effect of allocating the exemption to the higher income earning non-custodial parent shifts the child tax credit away from the custodial parent’s household.
Additionally, many parents erroneously believe that by claiming the exemption this automatically entitles them to head of household filing status. Form 8332 clearly states that the release of exemption does not apply to other tax benefits, such as the earned income credit, dependent care credit, or head of household filing status. The tax payer must independently meet the requirements for each of these tax benefits.
In short, the new tax laws significantly change the net effect on the combined household incomes of divorced, separated and nonmarried parents. Parents should consult with a qualified tax preparer before allocating the exemption to the noncustodial parent. In a contested matter before the state court judge, parents should be prepared to present evidence as to the relevant facts in their case and how the allocation of the exemption may affect all tax benefits available to either parent.
If you want a better understanding of federal tax returns & child defendants and how divorce or separation can affect your filings, please contact our office to schedule a consultation. The Law Office of Bawden & Kochis also handles legal issues regarding adoption, annulment, mediation, child custody (with no accompanying domestic violence), child and spousal support as well as pre-marital and post-marital agreements. Telephone (909)792-0222, or email us at [email protected]