The Dependent Tax Deduction - New Rules

The rules for the Dependent Tax Deduction after divorce have changed. Prior to 2008, a non-custodial parent could claim the deduction by simply attaching certain sections from the divorce decree or separation agreement that outlined the years each parent could claim the child. But starting in 2009, the IRS no longer accepted this is proof to claim the deduction.

Closeup of dependent tax deduction from tax manual

Instead, the IRS stipulated conditions for claiming the deduction. For example, from 2009 and forward, the custodial parent is the one with whom the child resides the greater number of nights during the year, regardless of the terms of the divorce decree. If the number of nights spent with each parent is equal, then the parent with the higher adjusted gross income is considered to be the residential or custodial parent.

The following article can help you understand what changes were made to the dependency exemption (dependent tax deduction) and how they will affect you.

Dependency Exemptions in Divorce

In 2008, the IRS amended Section 152(e), which deals with dependency exemptions. The changes to the tax code can be summarized as follows:

1. A divorce agreement or court order can no longer be used as a substitute for Form 8332.

2. The custodial parent, for 2009 and forward, is the one with whom the child resides the greater number of nights throughout the year, regardless of the terms of the divorce decree.

3. 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.

Given these changes, all non-custodial parents who plan to take a dependency exemption should obtain Form 8332 for 2009 and all future tax years.

For any future settlement agreements that will include a provision for a non-custodial parent to take a dependency deduction for one or more children in one or more future tax years, have the custodial parent complete Form 8332 coincident with executing a settlement agreement.

Do not forget that 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. As part of any discussion surrounding the dependency exemption, you should consider the various "Phase Out Amounts" - i.e. at what level of income benefits diminish.

For 2009, the Child Tax Credit phases out from $75,000 to $95,000 (of Adjusted Gross Income) and Hope and/or Lifetime Learning Educational Tax Credits phase out from $48,000 to $58,000 for single and head of household filers. The credits are generally more valuable to low and middle income filers than the dependency exemption itself.

Finally, remember that the custodial parent is the only parent eligible for additional tax benefits, such as filing as Head of Household, the Earned Income Credit, and the Child and Dependent Care Credit. As a result of the varying phase outs, credits, deductions and overall complexity in this area of the tax code, please be sure you understand how the terms of a settlement will impact income taxes before signing a settlement agreement.

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Copyright 2009 by Noah Rosenfarb

As an additional note, if you decide to revoke your release of claim to the exemption, it will not be effective until the tax year after you've provided the non-custodial parent with a copy of the revocation. For example, if you revoked the claim to exemption in 2011, the earliest tax year it will be effective is 2012.

It's a good idea to keep a copy of the revocation for evidence if any disputes arise. You'll also need to attach a copy of your revocation to your tax returns for every year the exemption will be claimed as a result of the revocation.

Along with who will claim the dependent tax deduction, another thing to consider is which parent will get to claim head of household for tax purposes. Find out what your options are in the related tax articles below: