New IRS Revenue Procedure 2008-48 details certain sections of the Internal Revenue Code under which a child of parents who are divorced, separated or living apart will be deemed the dependent of both parents, custodial and noncustodial, whether or not the custodial parent has released his/her claim to the dependency tax exemption. The Procedure became effective August 18, 2008 and may be applied in any taxable year beginning after December 31, 2004 where the period of limitation on a credit or refund under Section 6511 of the Code has not expired as of the effective date.
The IRS generally provides that a dependent child under these circumstances can only be claimed as an exemption by the custodial parent. Section 152(e)(2) of the Code provides that, in the absence of a qualified pre-1985 instrument, a child may be treated as the dependent of the noncustodial parent only if the custodial parent releases the claim to the exemption (i.e., has signed a written declaration that he/she will not claim the exemption for any taxable year, which the noncustodial parent then attaches to his/her own return). The new Procedure creates an exception to this commonly known tax rule, impacting exclusions generally involving medical care and expenses, as well as fringe benefits, incurred by noncustodial parents for their dependent children. It applies to taxpayers who:
1) Are divorced, legally separated under a decree of divorce or separate maintenance, legally separated under a written separation agreement, or live apart at all time for the last 6 months of the calendar year; and
2) Are the parents of a child who:
a. Receives over ½ of the child’s support during the calendar year from the child’s parents;
b. Is in the custody of one or both parents for more than ½ of the calendar year; and
c. Qualifies under Sections 152(c) or 152(d) of the Code as a qualifying child or qualifying relative of one of the child’s parents.
While some observers might think that this new Procedure benefits noncustodial parents, oftentimes dads, what may more likely happen moving forward, because there is a dispute, both parents will claim the dependency exemption. When that happen, they will probably both be audited.
EDITORS NOTE: Obviously, the better practice is to have an agreement as to the allocation of dependency exemptions, in order to avoid the problem of both parents claiming the exemption. In fact, this is typically done as part of divorce settlements. However, to avoid a situation where someone has a right to claim an exemption but has not paid their support which gives right to the exemption, I often include a provision in agreements that states that in order for the non-custodial parent to be permitted to claim the exemption, they must be current in their child support as of December 31st of the applicable tax year.
This also leads to a comment that people often spend more in the fight for the exemption then is at stake. Specifically, in high income cases, the exemptions may provide little or no tax relief given that the use of the exemption phases out as income increases.
-Eric S. Solotoff