New Tax Law Changes Dependency Exemption Test

The Bedrock Blues!

Effective July 2, 2008, Congress has amended 26 CFR Sec. 1.152-4 dealing with the allocation of dependent exemptions of divorced or separated parents. The new regulations make some significant changes in past practices. Some examples will help highlight the revisions, so take the bedrock blues quiz and see if you understand the changes!

EXAMPLE 1 – Fred and Wilma Flintstone are getting a divorce. Fred moves out of the home in April and moves in with the Rubbles next door. Since moving out Pebbles, their one year old daughter, stays Tuesday and Thursday night with Fred and every other weekend Friday – Monday morning. Wilma has temporary custody of Pebbles, is designated the custodial parent, and receives child support from Fred. During the summer Fred takes Pebbles on a camping trip for two weeks with the Rubbles. The divorce is still pending in the next year and each file separately and claim Pebbles as a dependant. Who had the right to claim Pebbles?

EXAMPLE 2 – Same facts as above except Fred takes no vacation. Fred is working at a quarry earning $67,000 a year. Wilma is working at a retail store and earns $24,000 a year. Who can claim Pebbles?

EXAMPLE 3 – The Flintstones get divorced in July, 2009. The final decree maintains the visitation and support schedule except that Fred no longer has overnight on Sunday, and the Marital Settlement Agreement signed by both parties incorporated into the Judgment for Dissolution of Marriage contains the following language: “Beginning in 2010 each spouse shall file separately and be responsible for all costs and liability pertaining to their own return. Wife agrees to fill out and sign a Form 8332 for the Internal Revenue Service stating that as the primary care taker and custodial parent she shall claim the child as a deduction for the even numbered tax years, 2010, 2012, etc. and that Husband as the non-custodial parent shall be permitted to claim the child as a deduction for the odd numbered tax years, 2009, 2011, etc.” Wilma does not sign an 8332. Fred attaches the front page, page indicating this language, and signature page along with Wilma’s social security number to his 2009 return. Both claim Pebbles. Who is going to get to claim her as a dependent?

EXAMPLE 4 – Same facts as above except Fred bellows at Wilma for not completing the 8332 and she writes a letter saying Fred can claim Pebbles as a dependent on his 2009 tax return so long as he is current in child support. Fred attaches this letter to his return. Fred was current on his support but Wilma and he have a big fight and she doesn’t think he should claim Pebbles so she also claims her. Who is going to receive the dependent exemption?

EXAMPLE 5 – Same facts except Wilma signs a Form 8332 listing years as listed in the settlement agreement. Fred is not current in child support at the end of the year. Wilma sends Fred a notice revoking her signed 8332. She attaches this to her return, Fred attaches the original form and they both claim Pebbles. Who will receive the dependent exemption?

PRACTICE TIP: Include Form 8332 in your list of documents to execute for prove-up! You can get that document http://www.irs.gov/pub/irs-pdf/f8332.pdf at www.irs.gov or call us at 847-844-1100 or e-mail: help@administerjustice.org.

Example Answers – How did you do?

1. Fred. Section 1.152-4 (d) provides in part, “The custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year, and the noncustodial parent is the parent who is not the custodial parent.” The amendment makes clear this determination is not effected by state law or decree and the examples demonstrate that nights during a vacation would be counted toward the parent on vacation. Since that would give Fred more nights than Wilma, they were separated more than six months, and each provided support for the child, Fred would be able to claim Pebbles.

2. Fred. Subsection 4 of the new provisions states, “(4) Special rule for equal number of nights. If a child is in the custody of one or both parents for more than one-half of the calendar year and the child resides with each parent for an equal number of nights during the calendar year, the parent with the higher adjusted gross income for the calendar year is treated as the custodial parent.” This tie-breaker rule is actually not new just the method for determining who is the custodial parent.

3. Wilma. Prior to this new provision Fred could have used the settlement agreement and Publication 501 still incorrectly states this. The comments, provisions and examples make clear that a settlement agreement incorporated into a state decree is NOT binding on the IRS and will have NO effect. As stated, “(ii) Form designated by IRS. A written declaration may be made on Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or successor form designated by the IRS. A written declaration not on the form designated by the IRS must conform to the substance of that form and must be a document executed for the sole purpose of serving as a written declaration under this section. A court order or decree or a separation agreement may not serve as a written declaration.”

4. Wilma. The signed declaration must be unconditional. — “(1) Form of declaration—(i) In general. The written declaration under paragraph (b)(3)(i) of this section must be an unconditional release of the custodial parent’s claim to the child as a dependent for the year or years for which the declaration is effective. A declaration is not unconditional if the custodial parent’s release of the right to claim the child as a dependent requires the satisfaction of any condition, including the noncustodial parent’s meeting of an obligation such as the payment of support.”

5. Fred. The 8332 was an effective release of the dependency exemption. The new revocation provisions are only effective for the year after issued. “ Revocation of written declaration—(i) In general. A parent may revoke a written declaration described in paragraph (e)(1) of this section by providing written notice of the revocation to the other parent. The parent revoking the written declaration must make reasonable efforts to provide actual notice to the other parent. 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 written declaration provides, or makes reasonable efforts to provide, the written notice.”