Parents Must File IRS Form or Risk Losing Child Dependency Deduction

Posted on August 13, 2007 by J. Benjamin Stevens

From the Family Law Taxation blog:

In order for a taxpayer to be entitled to the dependency deduction, the taxpayer must satisfy rather explicit statutory requirements. In the case of a divorce or separation, this can be particularly difficult for the individual that does not have custody (referred to as the "noncustodial parent") -- even if the individual was "granted" the deduction as part of the divorce proceedings.

Dependency deduction for noncustodial parents: The noncustodial parent is not entitled to the dependency deduction unless the individual attaches a valid written declaration (IRS Form 8332 or its equivalent) to their Federal tax return for the year the deduction is claimed. In the event a written declaration relinquishes more than one year, then the original must be attached to the first claimed year and a copy attached to each subsequently claimed year.  For a discussion of these rules -- see FAQ: Dependency Deduction.

In Chamberlain v. Commissioner, the U.S. Tax Court ruled that the former husband (taxpayer) was not entitled to the dependent deduction for one of his children because he didn't attach a valid IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) to his 2003 Federal tax return (the child credit was also denied because it is premised on being entitled to the dependent deduction for the child). The Tax Court concluded that the attachment of a Post-It note referencing the initial (1995) Form 8332 didn't satisfy the statutory requirement of attaching a valid written declaration.

The taxpayer's former wife executed a Form 8332 in which she relinquished the dependency deduction for one of their two children beginning in 1995 and for all future years. The taxpayer claimed that he attached the original Form 8332 to his 1995 return, but that a subsequent fire destroyed all of his copies. The IRS was unable to provide a copy because their 1995 tax return information had been destroyed (pursuant to IRS document destruction policies).

This result may seem harsh, but as the Court indicated, "Although we are sympathetic with [taxpayer's] plight, we are bound by the wording of the statute as enacted and accompanying regulations when consistent therewith."

Source:  "Dependency Deduction Goes Down in Flames: Tax Court Rules Noncustodial Parent Is Not Entitled to Dependency Deduction Because a Valid Form 8332 (or Equivalent) Wasn't Attached to His Tax Return" published at the Family Law Taxation blog.

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Tax Mistakes to Avoid During Divorce

Posted on July 19, 2007 by J. Benjamin Stevens

Reasons to consider filing your taxes separately from your spouse:

  • You don't trust your ex. When you sign a joint return, you can be equally liable for all taxes, penalties and interest owed. If your ex-spouse doesn't pay, the IRS can come after you for the whole amount.  However, you might be able to claim innocent spouse relief if your spouse greatly understated his or her income and you had no way of knowing that when you signed the return.
  • Your ex owes back taxes, back child support from a former marriage or has defaulted on federal student loans. If you file jointly under such circumstances, any refund you may be entitled to may be put toward your ex-spouse's debts.
  • One of you has a low income but very high deductions. In this case, it may make more financial sense to file separately.
If you file separately, you forfeit the following credits and deductions:
  • Earned income tax credit (EITC)
  • Child and dependent care credit
  • Adoption expenses credit
  • Hope and lifetime education credits
  • Qualified tuition deduction
  • Student loan interest deduction
  • Ability to deduce some of your Social Security benefits
The following factors determine which parent gets to claim the children as dependents on his/her tax returns:
  • Unless there is an agreement or order stating otherwise, the custodial parent – that is, the parent with whom the child lives -- normally takes the dependency exemption when you file separately.
  • The custodial parent can sign a formal release enabling the non-custodial parent to claim the child.  This often makes sense if the noncustodial parent earned the most income during the year.
  • The dependency exemption cannot be divided, even if the children lived with each parent one-half of the year. Only one parent can claim the exemption for each child.
  • Unlike with alimony payments, child support payments are not deductible to the parent who makes them, nor is it treated as taxable income of the parent who receives them.
Even if you decide to file separately from your spouse, you must still cooperate with him/her for these tax issues, for the following reasons:
  • You must put your spouse's name and Social Security number on your return, so the IRS can match up both your returns to see if there are any discrepancies.
  • You either both have to itemize or you both have to take the standard deduction.
  • If you do itemize, coordinate who takes which deductions that you normally would have taken together as a couple.
  • If you file jointly, decide before filing your return just how you'll divvy up the refund or the tax bill, and consider put any such agreement in writing or make it part of a court order.
Source:  "Recently Split? Avoid Costly Tax Mistakes" by Jeanne Sahadi, published at CNNMoney.com.

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