Dependent Child of Divorced or Separated Parents or Parents Who Live Apart

Many parents who find themselves in the midst of a dissolution action may have looming questions regarding tax obligations and entitlement to claims of tax credits or deductions. On July 2, 2008, regulations relating to a claim that child is a dependent by parents who are divorced, legally separated under a decree of separate maintenance, or separated under a written separation agreement, or who live apart at all times during the last six (6) months of the calendar year. These Income Tax Regulations may be found at 26 CFR part 1 and relates to section 152(e) of the Internal Revenue Code. These final regulations apply to taxable years beginning after July 2, 2008.

 

It is important to understand the scope of these new regulations in order to determine whether they apply to your situation. For taxable years beginning before January 1, 2005, section 152(e)(1) provided that a custodial parent was basically entitled to claim the dependency exemption. Therefore, if (1) the parents of a child were divorced, legally separated, or lived apart during the last six (6) months of the taxable year, (2) the child was in the custody of one or both parents for more than one-half of the taxable year, and (3) the child received over one-half of the child’s support during the calendar year from one or both parents, the child was treated as receiving over one-half of the child’s support from the custodial parent unless an exception applied. Section 152(e)(2) provides an exception treating the child as receiving over one-half of the child’s support from the noncustodial parent if the custodial parent released the claim to the exemption.

Section 152(e) includes two (2) provisions relating to the concept of “custody:” (1) section 152(e) applies only if a child is in the custody of one or both parents for over one-half of the calendar year; and (2) in the absence of a qualified pre-1985 agreement, the noncustodial parent may claim the exemption only if the custodial parent, which is defined as the parent having custody for the greater portion of the calendar year) releases the claim to the exemption. The regulations are silent as to a definition of the term “custody”.

The absence of a definition of the term “custody” in the regulations may create ambiguity in determining whether section 152(e) applies. The final regulations provide that a child is in the custody of one or both parents for more than one-half of the calendar year if one or both parents have the right under state law to physical custody of the child for more than one-half of the calendar year. A child, however, is not in the custody of either parent for purposes of section 152(e), for example, when the child reaches the age of majority under state law.  See Boltinghouse v. Commissioner, T.C.M. 2007-324.  

As for the application of section 152 to a child residing with a third party, section 152(e)(1) provides that, if specified conditions are met, section 152(e) applies notwithstanding the principal place of abode test of section 152(c)(1)(B) and the tiebreaker rule of section 152( c)(4) for a qualifying child, or the support test of section 152(d)(1)(C) for a qualifying relative. The regulations include examples illustrating when section 152(e) applies to determine the right to claim a child as a dependent, and how the nights during which the child resides with a third party may be allocated to a parent.  These examples may be reviewed by visiting www.irs.gov.

The regulations provide that a child who is treated as the qualifying child or qualifying relative of a noncustodial parent under section 152(e) is treated as a dependent of both parents for purposes of sections 105(b), 132(h)(2)(B), and 213(d)(5).  Consistent with the statutory language of those provisions, the final regulations clarify that, if section 152(e) does not apply, then this rule treating the child as a dependent of both parents does not apply. Thus, if a custodial parent does not release the claim to the exemption, only the taxpayer who is entitled to claim the child as a dependent under section 152(c) or (d) may treat the child as a dependent for purposes of sections 105(b), 132(h)(2)(B), and 213(d)(5).  

With regard to release of the claim to the exemption, section 152(e)(2) provides that a custodial parent may release a claim to an exemption for a child by signing a written declaration that he or she will not claim the child as a dependent. The regulations provide that the written declaration may be made on Form 8332, the Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or successor form, and any declaration not on Form 8332 must conform to the substance of that form. This form may be downloaded by visiting www.irs.gov. In addition, the regulations provide that a court order or decree may not serve as the written declaration.

Separation agreements, divorce decrees, and similar pleadings are complex documents which may be subject to varying interpretations under state law.  By allowing these documents to serve as a written declaration, a heightened level of uncertainty is created. To this end, the final regulations retained the rule that a written declaration not on Form 8332 (or a successor form) must conform to the substance of Form 8332, and further provide that a release not on a Form 8332 must be a document executed for the primary purpose of releasing the claim. The final regulations provide specifically that a court order, separation agreement, or decree may not serve as the written declaration.  For tax planning purposes, these rules will improve tax administration and reduce controversy.

The regulations provide that if a release of a claim to a child is for more than one year, the noncustodial parent must attach the original written declaration to the parent’s return for the first taxable year for which the release is effective and a copy of the written declaration for later years. In addition, the final regulations allow a taxpayer to attach a copy of a declaration to a tax return during the first year the release is effective in addition to subsequent years.

According to the regulations, Form 8332 or a substitute document may be executed for multiple years. Further, to provide flexibility to parents whose circumstances change, the regulations allow a custodial parent to revoke a release, but the revocation may be effective no earlier than the taxable year that begins in the first calendar year after the calendar year in which the parent revoking the release provides notice of the revocation to the other parent. Section 152(e) provides for the unilateral release of an exemption by a custodial parent.  The regulations also provide that the taxpayer revoking the release must attach the original or a copy of the revocation to the taxpayer’s tax return for any taxable year the taxpayer claims the exemption as a result of the revocation, and keep a copy of the revocation and evidence of delivery of written notice of revocation to the noncustodial parent.  In order to increase the likelihood that the noncustodial parent will receive notice of a revocation, the final regulations require that the parent revoking the release notify, or make reasonable attempts to notify, in writing, the other parent of the revocation.  Mailing a copy of the written revocation to the noncustodial parent at the last known address or at an address reasonably calculated to ensure receipt generally satisfies this requirement.

The regulations do not address whether the rules for releasing a claim to an exemption and for revoking a release apply to a written declaration that is effective for several years and that was executed before the applicability date of the regulations. In addition, the final regulations provide that a multiple year written declaration executed in a taxable year beginning on or before July 2, 2008, that satisfies the requirements for the form of a written declaration in effect at the time the written declaration is executed is treated as satisfying the requirements for the form of a release under the final regulations.  The final regulations provide, however, that the provisions for revoking a release of a claim to an exemption apply without regard to whether a custodial parent executed the release in a taxable year beginning on or before July 2, 2008. Thus, a release executed in a taxable year beginning on or before July 2, 2008, may be revoked.

For examples and illustrations regarding the applicability of this section, please refer to section 152(e) of the Internal Revenue Code which may be read in its entirety at www.irs.gov.

 

Milandria King is a Senior Attorney in the Memphis, Tennessee office for Cordell & Cordell, P.C., admitted to practice law in the state of Tennessee. Additionally, Ms. King is admitted to practice before the Sixth Circuit Court of Appeals and before the United States District Court for the Western District of Tennessee. Her memberships include the American Bar Association, the Memphis Bar Association, the Tennessee Bar Association, as well as the Association for Women Attorneys.

Read more about Ms. King.

 

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