Case — Dependency Exemption – Divorced Parents

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TL Case Summ

THE QUESTION

When a taxpayer’s former spouse fails to provide the proper IRS form for releasing a claim of exemption, can the taxpayer file substitute paperwork?

THE DISPUTE

Taxpayer Says: The separation agreement provided with the tax return is sufficient for claiming the dependency exemption.

Internal Revenue Service Says: The agreement provided with the tax return is missing several required elements, including the social security number of the ex-spouse.

THE LAW

From Internal Revenue Code Section 152(a)(1), (c)(1): A “dependent” child in tax law means a child who gets more than half her support from a taxpayer with whom she lives for more than half of the year.

From Internal Revenue Code Section 152(e)(2): Applies where the custodial parent signs a written form, called a declaration, in which she states she won’t claim that child as a dependent and the noncustodial parent then attaches the executed declaration to his tax return for that year.

From Federal Tax Regulation 1.152-4(c): The general rule for children of divorced parents is that the “custodial” parent gets to claim them as dependents, but the divorce decree or separation agreement can say otherwise.

From Federal Tax Regulation 1.152-4(b): Divorcing parents can either agree who has “custody” for this purpose, or leave it to a judge to count the number of days each year that the child is in each parent’s care and treat the one who has physical custody for the greater portion of the calendar year as having “custody”.

From Temporary Federal Tax Regulation 1.152-4T(a), Q&A-3: Form 8332 is the IRS form most people use to make this declaration, but a taxpayer can use any statement that “conform[s] to the substance” of Form 8332.

THE CAUSE OF THE DISPUTE

To claim an exemption for a dependent child on your federal income tax return, the child must meet certain rules, such as the residency requirement (or principal place of abode), which means the child must have lived with you for more than half the year.

There is an exception to the residency rule for divorced or separated parents. If you’re the custodial parent, you can release your claim of exemption to the other parent, allowing the other parent to claim the child for purposes of the dependency exemption and other tax benefits, such as the child tax credit.

In this case, the taxpayer’s ex-spouse was the custodial parent of their child. In the separation agreement, she agreed the taxpayer could claim the child as his dependent for the year of the divorce and all subsequent years. Further, she agreed to sign the IRS form allowing him to do so and attach it to her tax return, as long as he was current with child support payments.

When the taxpayer filed his 2006 return, he was current with his payments, but his ex-wife refused to sign the IRS form. The taxpayer claimed the child as his dependent and attached the signed copy of the separation agreement to his return. He believed that would be sufficient because almost all the information requested on the proper IRS form (Form 8332) was in the separation agreement.

The IRS disallowed the dependency exemption, saying the separation agreement did not include the social security numbers of both parents, as requested on Form 8332. In addition, the separation agreement contained conditional language, in which the wife stated she would sign the required IRS form and attach it to her return (instead of a statement attached to his return, as was actually filed).

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
Sorry, wrong answer :(
For the taxpayer. The separation agreement states the taxpayer shall receive the dependency exemption for calendar year 2000 and for any taxable years henceforth. The applicable regulations specifically allow this kind of general release. This phrase is an unconditional promise by the ex-spouse not to claim the child as a dependent, and completing Form 8332 and attaching it to her tax return would have no effect on the taxpayer’s right to claim the child as a dependent on his tax return. A taxpayer can use any statement that “conform[s] to the substance” of Form 8332. We apply the agreement as it stands, find that the child was the taxpayer’s qualifying child, and hold that the taxpayer is entitled to a dependency exemption and a child credit.
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