The Working Families Tax Relief Act of 2004 set a uniform definition of a qualifying child, beginning for Tax Year 2005.
In a divorce situation, the parent with whom the child lived for more then six months out of the year is considered the parent entitled to the exemption. If the time is split evenly between both parents, then the parent with the highest adjusted gross income is the one entitled to the exemption.
The entitled parent can waive the exemption and allow the ex-spouse to claim the child dependency exemption. Remember that when the entitled parent does agree to give up the exemption, he or she is also giving up the child tax credit, which can be worth up to $1000 per child.
In order to be able to take the exemption, the IRS states that the non-custodial parent must obtain a signed waiver of the exemption from the custodial parent on Form 8332 or the divorce agreement must unconditionally give the non-custodial parent the right to the exemption. The agreement must explicitly state that the custodial parent will not claim the exemption for the specified years and the custodial parent must sign it. Even if the Kentucky state court gives the exemption to the non-custodial parent, the IRS will disallow it if the parties have not fulfilled the federal requirements.
For example, in a 1998 Kentucky divorce agreement, the presiding trial judge gave Kathy Smith’s ex-husband, Bill, the right to claim the dependency exemptions even though the children lived with Kathy more then 6 months out of the year. The agreement was signed by the attorneys but not by Kathy or her ex-spouse. The next few years both Kathy and Bill claimed the children. Bill attached the divorce agreement which gave him the dependency exemption each year with his tax return. The IRS got involved and stated that even though the state court intended for Bill to have the exemptions, the parties did not fulfill the federal requirements under which a non-custodial parent may claim the exemptions, and therefore, Bill was found to owe additional taxes plus interest for those years.
Can you guess what requirement was not met in this case? Kathy never signed the agreement.
Remember that when the custodial parent gives up the exemptions to the ex-spouse, he or she loses the child tax credit and the tax exemptions but can still file as Head of Household and can claim the Earned Income Credit if it applies to his or her situation.
