Dependency rules can trip up taxpayers

A recent Tax Court case (Hendricks, T.C. Memo. 2014-192) illustrates the problems taxpayers can face if they do not strictly adhere to the rules regarding dependents. The taxpayer involved was the noncustodial father of a minor child who lost the benefit of several tax provisions, including the child tax credit, dependency exemption, and earned income tax credit (EITC).

A final divorce judgment, issued before July 2, 2008, awarded the taxpayer the dependency exemption for the child. However, the Tax Court held that he was not entitled to claim the child for purposes of the EITC. The EITC is awarded to the parent the child has spent more than one-half of the tax year with, if that parent’s abode is located in the United States. Since the father did not have custody, the child did not spend more than one-half of the tax year with him. Thus, noncustodial parents generally will have difficulty claiming their dependent as a qualifying child for EITC purposes under Sec. 32(c)(3).

The father was also not entitled to a dependency exemption for the minor child even though the final divorce judgment awarded it to him. The judgment failed to meet the requirements because the ex-wife had not signed it. The father also was not entitled to the Sec. 24 child tax credit because the child was not his qualifying child under Sec. 152(c). The parent who has the child for the most days during the year does not necessarily get the dependency exemption but can file prospectively to take the exemption the next year. Claiming those exemptions, however, may violate the divorce decree.

A child’s custodial parent usually can treat the child as a qualifying child for purposes of the EITC, head-of-household status, and the dependent care credit. However, whether a child of a divorced or separated parent is a qualifying child for purposes of the child tax credit and the education credits is based in part on whether the parent can claim a dependency exemption for the child on his or her return. In general, only the custodial parent can claim the dependency exemption for a child; however, the custodial parent can waive his or her right to claim a child as a dependent.

Frequently, a couple’s divorce decree or separation agreement will include a provision granting the noncustodial parent the dependency exemption for a child for some or all years. However, for tax years beginning after July 2, 2008, to properly waive the exemption in favor of the noncustodial parent for federal income tax purposes, the custodial parent must sign a properly filled out Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a similar statement. Thus, for years after 2008, even if a divorce decree or separation agreement gives the noncustodial parent the right to take a dependency exemption for a child, the custodial parent can effectively revoke the noncustodial parent’s ability to take a dependency exemption or the child tax credits or education credits by not signing Form 8332 or a similar statement.

For a detailed discussion of the issues in this area, see “Recent Developments in Individual Taxation,” by the members of the AICPA Individual and Self-Employed Tax Technical Resource Panel, in the March 2015 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief, The Tax Adviser

The Tax Adviser is the AICPA’s monthly journal of tax planning, trends, and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or email taxsection@aicpa.org for a subscription to the magazine or to become a member of the Tax Section.