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Dependency Exemption Non-Custodial Parents

The Internal Revenue Service released a memorandum in 2009, clarifying the rules governing non-custodial parent’s ability to claim a dependency exemption for their child.

Previously, the Service allowed a non-custodial parent to claim an exemption for a child if the custodial parent signed a written declaration releasing claim to the exemption and the non-custodial parent attached that declaration to their return. IRS Form 8332 is available to document this release.  In Publication 501, Exemptions, Standard Deduction, and Filing Information, the Service has stated that a non-custodial parent may attach certain pages of a divorce decree or separation agreement, instead of Form 8332, if the attached pages include the information required on the form. Click here for more information from the IRS.

The Problem

A problem arose in the ambiguous language of the actual code.  It stated the release of a claim must be on Form 8332 or, if not on such form, must “conform to the substance of such form.” The ambiguity begat creativity and family law attorneys began drafting the declarations into settlement agreements. Taxpayers would then simply need to attach a copy of their divorce decree. This eliminated the need for Form 8332 and therefore, the need to speak to your ex-spouse every year requesting a signature.

The recent memorandum was directed specifically at the question whether it was allowable for a non-custodial parent to prove their right to the exemption by submitting proof of satisfaction of a condition in a divorce decree. The condition was that the non-custodial parent may only claim the exemption if current in his or her support obligation. This raises the problem of substantiation.

In the 2009 memo, the Service concluded the release must be on Form 8332 or must be a document conforming to the substance of Form 8332 and has as its only purpose the release of a claim to exemption. A divorce decree, separation agreement or parenting plan allowing a non-custodial parent to claim an exemption for a child, only if a condition is met, does not conform to the substance of Form 8332.  For tax years beginning after July 2, 2008, a settlement agreement, decree or judgment may not be used by a non-custodial parent to substantiate a dependency exemption for a child.

These regulations reflect the Service’s concern about substantiating a claim to a dependency exemption for a child and are intended to avoid problems of proof, minimize controversy, and minimize costs to parents.  The change does not preclude a non-custodial parent from claiming the exemption; it simply requires more care be made to make sure this is accomplished.

It may be helpful to include language stipulating the custodial parent will execute Form 8332 on a yearly basis. This follow up challenge can be alleviated by insuring the newly single parents consult a financial advisor with specific experience in the field of divorce financial planning. Two parents claiming an exemption for the same child will end in IRS audits for both and possibly bring a settled case back into the courtroom.