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Who can use the tax exemption for a minor child once the parties are living separate and apart?

Most people think that if the Divorce decree says they can take the exemption then the IRS will go along with it. This is NOT correct. I must caution anyone that as to all tax matters you should rely on your personal tax expert. The purpose of this article is to show you the issues. The tax code and regulations change frequently and you must stay up to date with this information.

The examples used are directly out of an IRS publication:

Children of Divorced or Separated Parents (or Parents Who Live Apart)

In most cases, because of the residency test (see item 3 under Tests To Be a Qualifying Child in Table 3), a child of divorced or separated parents is the qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if the special rule (discussed next) applies.

Special rule for divorced or separated parents (or parents who live apart). A child will be treated as the qualifying child of his or her noncustodial parent if all four of the following statements are true.

  1. The parents:
    1. Are divorced or legally separated under a decree of divorce or separate maintenance,
    2. Are separated under a written separation agreement, or
    3. Lived apart at all times during the last 6 months of the year, whether or not they are or were married.
  2.  The child received over half of his or her support for the year from the parents.
  3. The child is in the custody of one or both parents for more than half of the year.

Custodial parent and noncustodial parent. The custodial parent is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent.

If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater number of nights during the rest of the year.

A child is treated as living with a parent for a night if the child sleeps:

  • At that parent’s home, whether or not the parent is present, or
  • In the company of the parent, when the child does not sleep at a parent’s home (for example, the parent and child are on vacation together).

Equal number of nights. If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income.

December 31. The night of December 31 is treated as part of the year in which it begins. For example, December 31, 2014, is treated as part of 2014.

Emancipated child. If a child is emancipated under state law, the child is treated as not living with either parent.

Absences. If a child was not with either parent on a particular night (because, for example, the child was staying at a friend’s house), the child is treated as living with the parent with whom the child normally would have lived for that night, except for the absence. But if it cannot be determined with which parent the child normally would have lived or if the child would not have lived with either parent that night, the child is treated as not living with either parent that night.

Parent works at night. If, due to a parent’s nighttime work schedule, a child lives for a greater number of days but not nights with the parent who works at night, that parent is treated as the custodial parent. On a school day, the child is treated as living at the primary residence registered with the school.

Example 1 – child lived with one parent greater number of nights. You and your child’s other parent are divorced. In 2014, your child lived with you 210 nights and with the other parent 155 nights. You are the custodial parent.

Example 2 – child is away at camp. In 2014, your daughter lives with each parent for alternate weeks. In the summer, she spends 6 weeks at summer camp. During the time she is at camp, she is treated as living with you for 3 weeks and with her other parent, your ex-spouse, for 3 weeks because this is how long she would have lived with each parent if she had not attended summer camp.

Example 3 – child lived same number of days with each parent. Your son lived with you 180 nights during the year and lived the same number of nights with his other parent, your ex-spouse. Your adjusted gross income is $40,000. Your ex-spouse’s adjusted gross income is $25,000. You are treated as your son’s custodial parent because you have the higher adjusted gross income.

Example 4 – child is at parent’s home but with other parent. Your son normally lives with you during the week and with his other parent, your ex-spouse, every other weekend. You become ill and are hospitalized. The other parent lives in your home with your son for 10 consecutive days while you are in the hospital. Your son is treated as living with you during this 10-day period because he was living in your home.

Example 5 – child emancipated in May. When your son turned age 18 in May 2014, he became emancipated under the law of the state where he lives. As a result, he is not considered in the custody of his parents for more than half of the year. The special rule for children of divorced or separated parents (or parents who live apart) does not apply.

Example 6 – child emancipated in August. Your daughter lives with you from January 1, 2014, until May 31, 2014, and lives with her other parent, your ex-spouse, from June 1, 2014, through the end of the year. She turns 18 and is emancipated under state law on August 1, 2014. Because she is treated as not living with either parent beginning on August 1, she is treated as living with you the greater number of nights in 2014. You are the custodial parent.

Tiebreaker rules. To determine which person can treat the child as a qualifying child to claim these six tax benefits, the following tiebreaker rules apply.

  • If only one of the persons is the child’s parent, the child is treated as the qualifying child of the parent.
  • If the parents file a joint return together and can claim the child as a qualifying child, the child is treated as the qualifying child of the parents.
  • If the parents do not file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year.
  • If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year.
  • If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person’s AGI is higher than the highest AGI of any of the child’s parents who can claim the child. If the child’s parents file a joint return with each other, this rule can be applied by dividing the parents’ total AGI evenly between them; see Publication 501 for details.

Subject to these tiebreaker rules, you and the other person may be able to choose which of you claims the child as a qualifying child.

Example 1 – separated parents.

You, your husband, and your 10-year-old son lived together until August 1, 2014, when your husband moved out of the household. In August and September, your son lived with you. For the rest of the year, your son lived with your husband, the boy’s father. Your son is a qualifying child of both you and your husband because your son lived with each of you for more than half the year and because he met the relationship, age, support, and joint return tests for both of you. At the end of the year, you and your husband still were not divorced, legally separated, or separated under a written separation agreement, so the special rule for divorced or separated parents (or parents who live apart) does not apply.

You and your husband will file separate returns. Your husband agrees to let you treat your son as a qualifying child. This means, if your husband does not claim your son as a qualifying child, you can claim your son as a dependent and treat him as a qualifying child for the child tax credit and exclusion for dependent care benefits, if you qualify for each of those tax benefits. However, you cannot claim head of household filing status because you and your husband did not live apart the last 6 months of the year. And, as a result of your filing status being married filing separately, you cannot claim the earned income credit or the credit for child and dependent care expenses.

Example 2 – separated parents claim same child.

The facts are the same as in Example 1 except that you and your husband both claim your son as a qualifying child. In this case, only your husband will be allowed to treat your son as a qualifying child. This is because, during 2014, the boy lived with him longer than with you. If you claimed an exemption or the child tax credit for your son, the IRS will disallow your claim to both these tax benefits. If you do not have another qualifying child or dependent, the IRS will also disallow your claim to the exclusion for dependent care benefits. In addition, because you and your husband did not live apart the last 6 months of the year, your husband cannot claim head of household filing status. And, as a result of his filing status being married filing separately, he cannot claim the earned income credit or the credit for child and dependent care expenses.

Applying this special rule to divorced or separated parents (or parents who live apart). If a child is treated as the qualifying child of the noncustodial parent under the special rule for divorced or separated parents (or parents who live apart) described earlier, only the noncustodial parent can claim an exemption and the child tax credit for the child. However, the custodial parent, if eligible, or other eligible person can claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, and the earned income credit. If the child is the qualifying child of more than one person for those tax benefits, the tiebreaker rules determine which person can treat the child as a qualifying child.

Example 1. You and your 5-year-old son lived all year with your mother, who paid the entire cost of keeping up the home. Your AGI is $10,000. Your mother’s AGI is $25,000. Your son’s father does not live with you or your son. Under the rules for children of divorced or separated parents (or parents who live apart), your son is treated as the qualifying child of his father, who can claim an exemption and the child tax credit for the child if he meets all the requirements to do so. Because of this, you cannot claim an exemption or the child tax credit for your son. However, your son’s father cannot claim your son as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, or the earned income credit.

You and your mother did not have any child care expenses or dependent care benefits, but the boy is a qualifying child of both you and your mother for head of household filing status and the earned income credit because he meets the relationship, age, residency, support, and joint return tests for both you and your mother. (Note: The support test does not apply for the earned income credit.) However, you agree to let your mother claim your son. This means she can claim him for head of household filing status and the earned income credit if she qualifies for each and if you do not claim him as a qualifying child for the earned income credit. (You cannot claim head of household filing status because your mother paid the entire cost of keeping up the home.)

Example 2. The facts are the same as in Example 1 except that your AGI is $25,000 and your mother’s AGI is $21,000. Your mother cannot claim your son as a qualifying child for any purpose because her AGI is not higher than yours.

Example 3. The facts are the same as in Example 1 except that you and your mother both claim your son as a qualifying child for the earned income credit. Your mother also claims him as a qualifying child for head of household filing status. You, as the child’s parent, will be the only one allowed to claim your son as a qualifying child for the earned income credit. The IRS will disallow your mother’s claim to the earned income credit and head of household filing status unless she has another qualifying child.

Divorced or legally separated parents cannot split the dependency exemption for a child.

If you each have a 50/50 visitation arrangement over a 6-month period in the tax year, you need to have one or both of the parties execute IRS Form 8332 and the person claiming the child should attach the form to his or her tax return.

 

Also see IRS publication 504.

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