As April 15h quickly approaches and the pressure to get those tax returns completed and filed grows, the issue of which parent can claim a child or children as a dependency deduction for tax purposes becomes more and more relevant.
All Property Settlement Agreements (“PSA”) or Final Judgments of Divorce should address this issue to avoid future complications. What about when the issue is appropriately addressed but one parent seeks to modify the terms so as to receive a benefit perhaps previously given up in lieu of some other benefit?
Recently, the Appellate Division heard the matter of Mitchell v. Mitchell, A-4856-07T1, decided March 11, 2009 (unpublished decision). In this case, the parties have been divorced since 2002 resolving their issues by entering into a negotiated Property Settlement Agreement. At the time of the divorce, husband was earning over $100,000 and wife was imputed income of $17,000. The two children were given as tax exemptions to the husband but resided primarily with the wife.
Both parties remarried. In 2008, wife filed a motion seeking, among other things, to amend the terms of the parties’ PSA to allow each party to claim one child as a dependency deduction on their tax returns. Her argument was based on the fact that husband now had twins with his current spouse and would receive that tax benefit. The trial court granted this request stating that there had been “numerous changes in circumstances” since the parties entered into the agreement and that such a request was “fair”.
The Appellate Division vacated and remanded this aspect of the trial court’s Order. In doing so, it noted that husband didn’t argue that the trial court was powerless to change or modify the terms of the PSA but rather that the judge’s conclusory determination of what was “fair” was insufficient to support the Order. The Appellate Division agreed stating that the “record does not disclose the tax effect if one of the child tax exemptions was taken from” the husband. Id. at pg. 6. The court must ascertain whether its fair and equitable to take from husband a right for which he had previously bargained and which may need to be determined with an evidentiary hearing.
In 2008, the IRS amended Section 152(e), which deals with dependency exemptions. The changes to the tax code can be summarized as follows:
The custodial parent, for 2009 and forward, is the one with whom the child resides the greater number of nights during the year, regardless of the terms of the divorce decree.
The custodial parent can unilaterally revoke the release of a child exemption for calendar years 2009 and forward, even if the release was made prior to 2009. As a result, it is important to make sure that there is a procedure in place to have the custodial parent file IRS form 8332 in a timely manner so that the non-custodial parent can claim the exemption that they are entitled to claim by reason of the parties’ agreement or a Court Order. Put another way, the change in the IRS section does not preclude a non-custodial parent from claiming the exemption, it just requires more care to make sure that this is accomplished.
As a further note, the individual claiming a dependency exemption is entitled to benefit from a Child Tax Credit and any allowable Hope and/or Lifetime Learning Educational Tax Credits.
For more information on the tax benefits/ramifications of these issues, you should consult a tax professional.