Episode 19: In this episode, Timalyn explains a tax issue related to separated and/or divorced parents, as it relates to claiming a child for tax purposes. This topic is confusing to parents, other tax professionals, and even some family law attorneys. Remember, regardless of what the divorce decree states, this issue is governed by federal tax law. They are completely different and guess which one has more authority?
According to a Pew Research article, the US has the largest percentage of children living in single-parent households. So, if this is your situation, you're not alone. In fact, 23% of the people under 18 live with one parent. As common as this situation is, the rules for which parents should claim the child on taxes are often misunderstood and handled incorrectly.
The IRS' Definition of Custodial Parent
The definition used by the family court may not be the same as the IRS' definition. The IRS considers the custodial parent to be the one the child lives with most nights. This is the parent who gets to claim the child on his/her tax return.
Based on the above definition, you may find it helpful to record the specific nights the child stays in your home. It will be proof to help you substantiate your status as the custodial parent to the IRS.
IRS Tie-Breakers
These exist in the event the child spends an equal number of nights with each parent. Remember, federal law supersedes state law. The IRS is federal law. Your divorce decree is based on state law.
Tie-Breaker #1: Which Parent Has the Highest Adjusted Gross Income (AGI)?
The AGI is explained in Timalyn's video, 15 Tax Terms Every Taxpayer Should Know. It's actually listed on your tax return.
Tie-Breaker #2: The Parent with the Highest AGI, if Nobody Else Can Claim the Child as a Qualifying Child
When the parents don't have custody of the child, this enables a grandparent or foster parent to claim the child.
Tie-Breaker #3: A Person with the AGI Higher than Either Parent, if the Parent Can Claim the Child as a Qualifying Child, but Does Not
This comes into play when someone such as a great-grandparent or other individual has custody of the child. If their AGI is higher than either parent and neither parent claims the child, the great-grandparent or other individual can claim the child.
While these rules exist, it doesn't necessarily prevent someone else (i.e. the other parent) from claiming the child on their taxes. So, what can you do if this happens to you? Timalyn will explain that in a few minutes.
How Can a Non-Custodial Parent Still Claim the Child?
If the divorce was cordial, it may be easier to accomplish this step. The other alternative is to negotiate the completion of IRS Form 8332, as part of the divorce settlement, if applicable. This is a Release or Revocation of Release of Claim to Exemption for Child by Custodial Parent.
Before the 2017 Tax Cut and Jobs Act, the child tax credit was expanded and the standard deduction was doubled, but the exemptions were eliminated. Form 8332 enables a non-custodial parent to claim the child tax credit, the additional child tax credit, and possibly credits for other dependents and educational credits (i.e. the Lifetime Learning Tax Credit and the American Opportunity Tax Credit).
Form 8332 does not enable the non-custodial parent to claim Head of Household status, the Earned Income Credit, or the Dependent Care Credit.
Keep the 8332 in Your Back Pocket
You'll want to make sure you keep a copy of the completed IRS Form 8332. It will help you to substantiate that you have the right to claim the child for specific years.
In the event the non-custodial parent is no longer able to claim the child, the custodial parent is to complete a new 8332 to revoke the authorization initially granted to the non-custodial parent. You'll probably need to consult with your attorney to determine if the non-custodial parent has actually lost the right to claim the child.
Until the IRS Form 8332 is complete, the IRS will use its Tie-Breaker Rules in making the determination, regardless of the divorce decree.
What Can You Do if the other Parent or Individual Claims the Child without Authorization?
There is another IRS form, 866-H-DEP available to deal with this situation. Your tax filing for the year in question must be mailed in, not e-filed. This form must accompany your tax filing. It outlines which supporting documents you will need to prove you should be able to claim the child, not the other person. You will need to provide Form 8332 if you have it as well as the cover and signature pages of your divorce decree. Your normal tax documents will need to be submitted too.
You also need to send a copy of the above packet of information to your state agency.
The IRS will review your claim and the other e-filed return, which claimed your child. They'll use the Tie-Breaker Rules first. The IRS Form 8332 will help you to prove you had the right to claim the child for that particular year.
If you're dealing with this type of situation, make sure you're working with a qualified tax professional with experience resolving this issue. If you need help finding a tax professional, listen to Episode 16, How to Choose a Tax Professional.
If you aren't able to claim the child, you may have a resulting tax liability. Timalyn encourages you to remember to breathe. As she often says, "back taxes shouldn't ruin your life." If you've listened to this episode, you have the information and steps required to successfully claim the child. It's time to take action.
As we conclude Episode 19, we encourage you to connect with Timalyn on social media. You'll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America's Favorite EA and she's here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today's episode.
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Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.
