With tax season in our midst, the question of claiming the child dependency exemption is consistently posed by our clients. Here is a recent development that you should keep in mind. As you may know, the non-custodial parent can claim the child dependency exemption, as long as the custodial parent signs a waiver promising not to claim the exemption. This is typically accomplished by the use of IRS Form 8332 (which was revised in January 2009.) Recent amendments to IRS regulations provide that a release not on a Form 8332 must be a document executed for the sole purpose of releasing the claim. A court order or decree or a separation agreement cannot serve as the written declaration. The noncustodial parent can no longer attach certain pages from a divorce decree or separation agreement instead of Form 8332 if the decree or agreement was executed after 2008. If the decree or separation agreement was executed before 2009, the noncustodial parent can continue to attach certain pages from the decree or agreement.
If the release of the child dependency claim is for more than one year, the noncustodial parent must attach a copy of the written declaration to the parent’s return for the first tax year for which the release is effective, as well as to returns for later years. Further, the custodial parent who released the right to claim a child can revoke the release for future tax years by providing written notice of the revocation to the other parent. The revocation can be made on Form 8332, or other form provided by the IRS. A revocation not on the designated form, must conform in substance to the form, and must be in a document executed for the sole purpose of revoking the release. A taxpayer revoking a release may attach a copy rather than an original to the taxpayer’s return for the first tax year the revocation is effective, as well as for later years.
If a non-custodial parent claims the child exemption first, and without the custodial parent’s permission, he or she is likely to receive the exemption temporarily. However, once the custodial parent files his or her tax return including the exemption, and IRS notices that a child’s social security number has been included on two different tax returns, then both parties would be notified by IRS that only one party is entitled to the exemption, and the tie-breaker rule would be used to resolve this situation. This rule says that if two parents claim that a child as a dependent, the parent with whom that the child lived with the longest during the year, receives the exemption. If the child had spent the same amount of time with both parents, then the parent that had the higher adjusted gross income would get the exemption. The parent who was not entitled to the exemption would have to repay the tax, plus penalties and interest.