There is sometimes a disconnect in the handling of dependency exemptions and related tax credits between what courts advise a taxpayer to do and what the Tax Code actually permits.
This can be a source of inequity to taxpayers, particularly in the case of divorced parents. These problems commonly surface when determining who is entitled to take the dependency exemption, the child and dependent care credit, the child tax credit, the earned income credit, and head-of-household filing status, noted Robbin Weiner, CPA, of Dayton, N.J.-based E. Martin Davidoff & Associates.
“It’s important that tax advisors tell their clients what language they need to include in their divorce settlement,” she observed. “They need to specify that the custodial parent is required to sign and provide the necessary Form 8332 to the non-custodial parent, which allows them to take the dependency deduction and the child tax credit.”
Weiner cited an instance in which a recently divorced client came into her office. “The mother was the custodial parent, and to enable her to work, she incurred additional aftercare expenses. The divorce court decreed that the parents of the child were to split the expenses 40/60,” she said. “The court instructed the father that he must pay the wife the full 60 percent and get his reimbursement for the tax credit by filing the dependent care credit on his own tax return. However, the Tax Code specifically does not permit a non-custodial parent to utilize this tax credit.”
The taxpayer’s former accountant had prepared his return and advised him to put the credit on the return, in addition to filing as a head of household. “But you’re not allowed to do that if you’re not the custodial parent,” explained Weiner.
The custodial parent is generally the parent with whom the child lived for the greater number of nights during the year. Form 8332 can be used by the custodial parent to release the claim for a dependency exemption to the noncustodial parent. It allows the noncustodial parent to claim the exemption and also the child tax credit.
However, Form 8332 does not allow the noncustodial parent to claim the child as a qualifying child in determining head-of-household filing status, the earned income credit, and the child and dependent care credit or the exclusion from income for dependent care assistance, Weiner indicated. Only the custodial parent may claim these, even if the Form 8332 waiver is provided to the noncustodial parent.
“The problem we had with the child care credit was that only the custodial parent can take it on the return,” said Weiner. “So when you write the divorce document, you also have to specify that if the custodial parent receives the credit, the noncustodial parent needs to be reimbursed for his or her share of the credit.”
A Tax Court decision earlier this week (Shenk, 140 T.C. No. 10, decided May 6, 2013) further illustrates the predicament a taxpayer may find himself in when trying to merge a state court order with the reality of the tax law, Weiner noted.
Michael Shenk’s judgment of divorce provided that his ex-wife would have primary residential custody of their three minor children, and that the dependency exemption would be divided according to various conditions. But it did not provide that the ex-wife should execute a Form 8332 for any year. For 2009, both Mr. Shenk and his ex-wife claimed the same child on their returns, and the husband also filed as head of household.
The Tax Court held that since Form 8332 was not executed by the wife nor attached to the husband’s return, he was not entitled to claim the dependency exemption deduction or the child tax credit. Moreover, since all three of his children resided with their mother for more than half the year, the court held he was not entitled to head of household status.