Proposed regulations issued last year provide greater certainty for parents with whom dependent qualifying children do not reside but who are allowed by the custodial parent to claim certain dependent tax benefits under Sec. 152(e) — a provision with respect to which taxpayers are prone to make errors.
The Sec. 152(e) special rule applies only to the dependency exemption and child tax credit, including the refundable portion. The exemption amount is zero for tax years 2018—2025 under P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA). However, the TCJA also significantly increased the child tax credit, which (for children who qualify under Sec. 24) can also be assigned to the noncustodial parent under the Sec. 152(e) release (see "Tax Practice Corner: Child Tax Credit Now Higher, More Widely Available," JofA, June 2018). Thus, far from being moot, this guidance could be even more significant for parents who are divorced, separated, or living apart from one another.
WAIVING THE CLAIM
The dependency exemption and child tax credit for a qualifying child are generally allowed for the parent who has primary custody of the child (custodial parent) during the calendar year. Sec. 152(e)(2) and Regs. Sec. 1.152-4 allow the custodial parent to waive those benefits to allow the noncustodial parent to claim them, provided the following conditions are met:
- The parents are divorced or legally separated under a decree of divorce or separate maintenance, separated under a written separation agreement, or lived apart at all times during the last six months of the calendar year, including parents who were never married;
- One or both parents together provided more than half the child's total support for the calendar year;
- One or both parents exercised legal custody of the child for more than half the year; and
- The custodial parent signs Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent (or a substantially similar document), stating that he or she will not claim the exemption for the child, and the noncustodial parent attaches a copy of the form to his or her own original or amended return for each year he or she claims the exemption and/or child tax credit. The custodial parent may execute Form 8332 effective for one, more than one, or all future tax years.
The release of the dependency exemption and child tax credit to the noncustodial parent does not affect any other child-related tax benefits (see Notice 2006-86 and Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of H.R. 4440, the "Gulf Opportunity Zone Act of 2005" (JCX-88-05) (Dec. 16, 2005), page 90). Thus, the custodial spouse retains (if applicable) the head-of-household status, child and dependent care credit, earned income tax credit, and exclusion from income for dependent care assistance under Sec. 129.
In January 2017, the IRS issued proposed regulations (REG-137604-07) to implement changes made by the Working Families Tax Relief Act of 2004, P.L. 108-311, and the Fostering Connections to Success and Increasing Adoptions Act of 2008, P.L. 110-351. Pending issuance of the final regulations, taxpayers may choose to apply these proposed regulations in any open tax years. One aspect of the proposed regulations provides guidance for noncustodial parents to attach the copy of a properly executed Form 8332 or written declaration to their returns, or for a custodial parent to revoke the release.
Generally, under the proposed regulations, where the custodial parent has already filed a return claiming the dependency exemption and/or child tax credit, the noncustodial parent must attach the executed form or declaration to an original timely filed (including extensions) return for the same tax year. For such a claim by the noncustodial parent on an amended return or in an examination, however, the custodial parent must first amend his or her return, if necessary, and release the claim. The following examples are adapted from the proposed regulations.
Example 1: The custodial parent (CP) files her 2017 return on March 1, 2018, claiming a dependency exemption and child tax credit for her child. CP signs Form 8332 on April 15, 2018, honoring the noncustodial parent's (NCP's) waiver request. NCP files his return and attaches Form 8332 claiming the same child as a dependent for purposes of the exemption and credit on April 15, 2018.
NCP is allowed a dependency exemption and child tax credit based on Sec. 152(e) and Regs. Sec. 1.152-4(b). CP is not allowed the exemption and credit for the child for 2017. This example and the next one do not address whether or how CP's tax return for 2017 would be revised to remove the exemption and credit and any resulting increased tax liability assessed.
Example 2: The facts are the same as in Example 1, except that NCP files a request for an extension to file his tax return because he does not have a signed Form 8332. CP signs Form 8332 in August 2018, and NCP timely files his return shortly thereafter. NCP attaches Form 8332 to his tax return claiming the dependency exemption and child tax credit.
NCP is allowed the exemption and credit based on Sec. 152(e) and Regs. Sec. 1.152-4(b), and CP is not allowed them.
The proposed regulations also allow for attaching Form 8332 to an amended return or for providing it during an examination. In these situations, Form 8332 will not allow the noncustodial parent to claim a dependency exemption or child tax credit if the custodial parent signed Form 8332 after filing his or her own return claiming the benefit or benefits for the child, unless the custodial parent first files an amended return removing the claim.
Example 3: CP files his 2017 return in March 2018, claiming an exemption and child tax credit for his child. NCP files her 2017 return on April 15, 2018, and does not claim the exemption and credit, even though the divorce decree allocates the exemption to her. CP signs a Form 8332 in August 2018 for the 2017 tax year. NCP files an amended return shortly thereafter, attaching Form 8332 to her return claiming a dependency exemption and child tax credit for 2017.
Based on Prop. Regs. Sec. 1.152-5(e), NCP is not allowed a dependency exemption or child tax credit for her child if CP has failed to file an amended return revoking his claim to the dependency exemption and credit for 2017.
A parent revoking the written declaration must attach a copy of the revocation (which can also be made on Form 8332) to the parent's original or amended return for each tax year for which the parent claimed the child as a dependent. The revoking parent must keep a copy of the revocation and evidence of delivery of the notice to the other parent, or of reasonable efforts to provide actual notice.
MORE CERTAINTY FOR NONCUSTODIAL PARENTS
While these proposed regulations leave unanswered whether or how a custodial parent's return would be adjusted in Examples 1 and 2, they provide greater certainty to noncustodial parents regarding when and how to attach a Form 8332 or other written declaration to their original or amended returns, and whether the custodial parent must amend a return claiming the child as a dependent for purposes of the dependency exemption or child tax credit. As the latter tax benefit is generally greater beginning in tax year 2018 than before, taxpayers making use of this special rule should be well-counseled by practitioners to make sure they observe all procedural requirements. Practitioners also should monitor any modifications of these rules resulting from the reduction of the dependency exemption amount to zero under the TCJA.
Kathy J. Rohloff, CPA, MPA, (firstname.lastname@example.org) is an accountant with the Bank of Bennington in Bennington, Neb.; an adjunct professor of accounting at Bellevue University in Bellevue, Neb.; and a seasonal tax accountant with Frankel Zacharia LLC in Omaha, Neb.
To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com or 919-402-4434.