Custody Determination: Who Gets the Dependency Exemption and Child Tax Credit?
A “custodial parent”1 for tax purposes means the parent with whom the child lived for the greater number of nights during the year. The noncustodial parent is the other parent. If the child was with each parent for an equal number of nights, the “custodial parent” is the parent with the higher adjusted gross income. This is known as the tie-breaker rule.
In the case of a child of divorced parents, if a child receives one-half of that child’s support during the year from that child’s parents and is in the custody of one or both for more than half of the year, then the child shall be treated as receiving over half of that child’s support during the year from the parent having custody for the greater portion of the year.2
In the event of so-called “split” or “joint custody” (sometimes referred to as “rotating custody”), “custody” will be deemed to be with the parent who, as between both parents, has the physical custody of the child for the greater number of nights.3
Greater Number of Nights
A child who is temporarily absent from a parent’s home for a night would be treated as residing with the parent with whom the child would have resided for the night. However, if a child resides with neither parent for a night, for example, because another party is entitled to custody of the child for that night, the child would be treated as not residing with either parent for that night. Under the tie-breaking rule in the regulations, if a child resides with each parent for an equal number of nights during the calendar year, the parent with the higher adjusted gross income for the calendar year would be treated as the custodial parent.4
A child resides with a parent for the night if the child sleeps at the residence of that parent (whether or not the parent is present) or in the company of the parent when the child does not sleep at a parent’s residence (for example, the parent and the child are on vacation together).5
A child who does not reside with a parent for a night is treated as residing with the parent with whom the child would have resided for the night but for the absence.6
The Internal Revenue Service gives the following example:7
Grandmother has the right to physical custody from January 1 through March 31, 2007. The Father and Mother have physical custody from April 1 through December 31, 2009. The child, during that period, would have the right to reside with the Father for 180 nights and with the Mother for 95 nights. However, the Father is away on military service from April 10 to June 15, 2009 and from September 6 to October 20, 2009. During these periods the child resides in the Grandmother’s house. The child would have resided with the Father if the Father had not been away on military service. The Grandmother unsuccessfully claims the child as a dependent. The Father gets the exemption because the child is treated as residing with the Father for the nights the Father is away on military service.
Exception for a Parent Who Works at Night8
If, in a calendar year, due to a parent’s nighttime work schedule, a child resides a greater number of days, but not nights, with the parent who works at night, that parent is treated as the custodial parent. On a school day, the child is treated as residing at the primary residence registered with the school.
Children Reaching Age 19
Neither parent has “custody” within the meaning of I.R.C. §152(e)(1) for children who have attained the age of 19.9 For the child who has reached age 19, the dependency exemption may be taken by the parent who provides over half of that child’s support if the child is a student not yet attaining the age of 24 at the close of the calendar year.10
“Student,” pursuant to the I.R.C.11 is defined as:
[A]n individual who during each of [five] calendar months during the calendar year in which the taxable year of the taxpayer begins — (A) is a full-time student at an educational organization described in section 170(b)(1)(A)(ii); or (B) is pursuing a full-time course of institutional on-farm training under the supervision of an accredited agent of an educational organization described in section 170(b)(1)(A)(ii) or of a [s]tate or political subdivision of a [s]tate.
Release/Revocation of Release of Dependency Exemption
The custodial parent is the parent who can take the dependency exemption and the child tax credit (as well as other benefits). However, the custodial parent can release to the noncustodial parent the right to claim the tax benefits by signing a written declaration (consent) to that effect, IRS Form 8332. A Florida divorce court can require the custodial parent to relinquish the dependency exemption by executing the proper form to do so.12
Form of Declaration
The declaration can have no conditions for the year or years for which the declaration is in effect.13
IRS Promulgated Form 8332
The IRS has promulgated Form 8332 “Release of Claim to Exemption for Child of Divorced or Separated Parents.” The last revision was January 2010. Effective for tax years after July 2, 2008, a written declaration not on the IRS form must conform to the substance of the form and must be a document executed for the sole purpose of serving as such written declaration. No longer will a court order or decree or a separation agreement serve as a written declaration.14 However, declarations signed before July 3, 2008, are still valid.
Dependency Exemption Notwithstanding Judgment Awarding Custody to Other Party
The number of actual nights spent with a parent controls, notwithstanding the provisions that may have been made in a Florida judgment setting forth a parenting plan. In Litton v. Comm., TC Summary Opinion 2006-56, the court granted the dependency exemption to the mother when she demonstrated from her personal calendar that she had custody for the greater portion of the year, despite the fact that she was allocated less custody time than her ex-husband in the Texas court’s divorce decree. The tax court chose to treat any night spent with a given parent as custody for the entire day. In Litton, the court observed:
In support of her contention, petitioner relies on her day-planner that was introduced into evidence. In the day-planner, petitioner placed a “K” (for “kids”) on each day that she had custody of the children and then numbered each such mark sequentially. The day-planner contained 195 “K” marks. Petitioner therefore asserts that she had physical custody of the children for 195 days in 2003, which is more than half of the year.
The court found that the mother diligently demonstrated the time that she had physical custody of the children in her day planner, which was maintained on an accurate contemporaneous basis. The court suggested the use of I.R.C. Form 8332 whenever there may be a question of who has custody of the children.15
Litton teaches that accurate contemporary records be kept of the overnights of the children and that it is advisable that IRS Form 8332 be utilized.
Darton & Jacobs v. Commissioner, T.C. Summary Opinion 2005-188, gives an interesting twist. A couples’ Utah divorce awarded custody of two children to each of the parents. It also provided that the husband could “purchase” a dependency exemption for either of the children in the wife’s custody. To do so, the husband was required to pay the wife “the difference in her income tax obligations when taking the exemptions and when not taking the exemptions.” The tax court upheld the denial of the dependency exemption to the husband because he had failed to attach Form 8332 to his tax return. And, since the wife had already claimed the exemption on her tax return, she could no longer release it to the husband. The fact that the husband had rights to the exemption under the terms of the divorce decree was held to be irrelevant to the tax law. If the wife violated the agreement by taking the payment and keeping the exemption, the husband’s only recourse was under state law for the recovery of the payment.
The court noted: “Neither the Internal Revenue Code nor this [c]ourt recognizes a taxpayer’s ability to ‘purchase’ a dependency exemption from the custodial parent. Furthermore, even if such an arrangement would be sanctioned, the Wife claimed the exemption on her return and was thus not able to release the exemption to the Husband.”
Revocation of Release of Dependency Exemption
The release by the custodial parent of the dependency exemption by use of Form 8332, or such other qualifying declaration signed by the custodial parent, could be revoked, but, as far as the IRS was concerned, only if the noncustodial parent would have refrained from claiming the same child as a dependent. Thus, the two ex-spouses would have had to concur in the revocation. If both parents do not agree, an audit would have resulted.16
Notwithstanding the IRS’s position, the divorce court may order the noncustodial parent to “agree” if the circumstances warrant. For example, failure to keep current in child support may provide such ground for a court order.
All of the above is modified by an IRS regulation that comes into effect after July 2, 2008.17 Under the regulations,18 a custodial parent who released the right to claim a child can unilaterally revoke the release for future tax years by providing a written notice of the revocation to the other parent. The revocation could be made on an IRS-to-be-designated form, which may be part of Form 8332, which the IRS may revise for this purpose. Alternatively, it can be made by a written declaration that conforms to the substance of that form, whether or not the release was made on the form. The revocation would have to specify the year or years for which it is effective. The parent revoking the release would have to attach the original or a copy of the revocation to the revoking parent’s tax return for any tax year the parent claims the exemption as a result of the revocation, and keep a copy of the revocation and evidence of delivery of written notice of the revocation to the noncustodial parent.
Reasonable efforts must be made to provide written notice to the noncustodial parent. The revocation may be effective no earlier than the taxable year that begins in the first calendar year after the calendar year in which the parent revoking the written declaration provides or makes reasonable effort to provide the written notification.19 The revocation document must be executed for the sole purpose of serving as a revocation, and it must specify the year or years for which it is to be effective.
Certainly, if such revocation is contrary to court order or the marital settlement agreement, the divorce court should be looked to for relief.
It was held in McDaniel v. McDaniel, 835 So. 2d 1265 (Fla. 1st DCA 2003), that there must be findings and evidence to support (justify) a court on modification to transfer exemption from one parent to the other.
Phase out of Personal (Dependents) Exemption
When a taxpayer reaches a certain level of income, the ability to utilize the dependency exemption phases out.20 The personal exemption phase out will be tied to adjusted gross income (AGI). The phase out begins at the following threshold amounts for 2008 and 2009.21 When AGI exceeds the phase out levels, two percent of the exemption amount is lost for every $2,500, or fraction thereof, of AGI exceeding the threshold amounts.22 Married filing separately lose two percent for every $1,250, or fraction thereof of, of AGI in excess of the phase out level.23 The amount of the exemption phase out reduction that would otherwise apply is reduced by two-thirds for tax years 2008 and 2009. The exemption phase out is repealed for tax years beginning after 2009, but the repeal is terminated for tax years beginning after December 31, 2009.24
Dependency Exemption Considered as Property
Notwithstanding that the custodial parent was awarded the continuous right to claim the children as exemptions for income tax purposes, a trial court was admonished that it should not counterbalance this by characterizing same as personal property and by attributing a present value to it for purposes of division of the marital estate. In Kriesel v. Gustafson, 513 N.W.2d 9 (Minn. App. 1994), the trial court was reversed for the assessment of a $4,630 value to the wife’s right to claim the children as future deductions for income tax filing purposes and adjusting the marital property distribution accordingly.
On the other hand, in Fear v. Rogers, 526 N.W.2d 197 (1994), the court articulated:
[T]he income tax dependency allocation normally should be considered part of the child support award, not as part of the property settlement. This, however, does not necessarily preclude the possibility that the parties might wish to choose to treat the exemption as a property right to be allocated in the property settlement.
Thus, the court held, if it was for property, it was not modifiable, but it was modifiable if it was for child support.
Child Tax Credit
In addition to the dependency exemption,25 the Taxpayer Relief Act of 1997, as modified by the Jobs and Growth Tax Relief Reconciliation Act of 2003, provided another benefit for taxpayers with children who claim the dependency exemption. It is the Child Tax Credit,26 which is an offset against tax liability. Any excess over actual tax liability is lost.27
The Child Tax Credit cannot be split from the parent who can take the dependency exemption.28 Thus, neither the parties by agreement nor the court by order can provide that one parent will utilize the dependency exemption and the other parent will take advantage of the Child Tax Credit.
The Child Tax Credit will be for each qualifying child29 who is under the age of 17 at the end of the tax year. The amount of credit for each child is $1,000 for the years 2005 through 2010.30 The term “qualifying child” includes U.S. citizens, resident aliens, and children who are U.S. citizens living abroad, or non-U.S. citizens living in Canada or Mexico.31 If a taxpayer has three or more qualifying children, certain other benefits concerning the credit may be taken.
The tax savings of the Child Tax Credit commences to phase out at different levels than the commencement of phase out for the dependency exemption. The phase out for the Child Tax Credit begins at a modified adjusted gross income32 for joint filers at $110,000, single filers and head of household at $75,000, and $55,000 for married filing separately.
The phase out for the total Child Tax Credit (i.e., the credit amount times the number of qualifying children) is $50 for each $1,000 (or part thereof) of modified adjusted gross income above the thresholds. Because the phase out reduces the total credit, the more children qualifying, the more income a taxpayer can have before the credit is used up. Neither the amount of credit, nor the phase out thresholds will be indexed for inflation for the Child Tax Credit.33 The phase out for the dependency exemption is indexed for inflation.
1 Although Florida no longer uses the terms “custodial parent.” See Fla. Stat. §61.13(3), the I.R.C. §152 does and so do the Treasury Regulations there under. Code and regulations control vis-à-vis the dependency exemption and child tax credits, which child tax credits, unless phased out, can be taken only by the parent who can take the dependency exemption.
2 I.R.C. §152(e)(1).
3 Treas. Reg. §1.152-4(b).
4 Treas. Reg. §1.152-4(a).
5 Treas. Reg. §1.152-4(d)(i)&(ii).
6 Treas. Reg. §1.152-4(4)(d)(3)(i).
7 Treas. Reg. §1.152-4(g).
8 Treas. Reg. §1.152-4(d)(5).
9 I.R.C. §152(f)(1).
10 I.R.C. §152(c)(3)(A)(ii).
11 I.R.C. §152(f)(2).
12 Ford v. Ford, 592 So. 2d 698 (Fla. 3d D.C.A. 1989).
13 Treas. Reg. §1.152-4(e)(i).
14 Treas. Reg. §1.152-4(e)(ii).
15 The court observed: “If the respective party were to attach Form 8332 to his or her return, then,. . . the parties might succeed in avoiding the issues that have arisen in the present case. Otherwise, we foresee that the [Internal Revenue Service] may disallow the dependency exemption deduction for both parents and require both of them to file petitions to this court for determination of who has custody for the greater portion of a particular taxable year.”
16 2000 TNT 35-55 (Dec. 23, 1999).
17 Treas. Reg. §1.152-4 (e)(3).
18 Prop. Reg. §1.152-4(d)(3).
19 Treas. Reg. §1.152.-4(e)(3)(i).
20 I.R.C. §151(d).
21 The phase out threshold is subject to adjustment each year for inflation. I.R.C. §151(d)(4).
22 I.R.C. §151(d)(3).
24 I.R.C. §§151(D)(3)(E) and (F).
25 See I.R.C. §§151 and 152.
26 I.R.C. §24.
27 The Senate Committee Report to the 1997 act explains the reasons for adding this Child Tax Credit as follows: “The [c]ommittee believes that the individual income tax structure does not reduce tax liability by enough to reflect a family’s reduced ability to pay taxes on family size increases. In part, this is because over the last 50 years the value of the dependent personal exemption has declined in real terms by over one-third. The committee believes that a tax credit for families with dependent children will reduce the individual income tax burden of those families, will better recognize the financial responsibilities of raising dependent children, and will promote family values. In addition, the [c]ommittee believes that the credit is an appropriate vehicle to encourage taxpayers to save for their children’s education.” Report on the 1997 act of the Committee on Finance, United States Senate, p.3.
28 I.R.C. §24(c)(1)(A). Note that the language of I.R.C. §24 providing for the Child Tax Credit is for a child for whom “the taxpayer is allowed a deduction under section 151,” the dependency exemption. (I.R.C. §24(c)(1)(A)). The language of I.R.C. §21 (b)(1), providing for Household and Dependent Care Credit, is for a child “with respect to whom the taxpayer is entitled” to the dependency exemption.
29 A “qualifying child” is defined as “an individual for whom the taxpayer can claim a dependency exemption, I.R.C. §24(c)(1)(A), and who is a son, daughter, stepson or stepdaughter of the taxpayer, or a decedent of any such individual or an eligible foster child of the taxpayer.” I.R.C. §32(c)(3)(B).
30 Working Families Tax Reform Act of 2004.
31 I.R.C. §24(a).
32 Modified adjusted gross income (AGI) is the AGI increased by foreign (I.R.C. §931) and Puerto Rico (I.R.C. §933) income exclusions.
33 The phase out thresholds for the dependency exemption are adjusted each year for inflation. I.R.C. §151(d)(4).
Melvyn B. Frumkes practices marital and family law in Miami. He is the author of Frumkes on Divorce Taxation (now in its 8th edition) and is a member of the Family Advocate Editorial Board.
This column is submitted on behalf of the Family Law Section, Diane M. Kirigin, chair, and Laura Davis Smith and Ingrid Keller, editors.