Child Dependent Exemption Tax Deduction and Divorce

For tax year 2009 and after, the rules for the Child Dependent Exemption Tax Deduction related to divorce have been changed.

The Internal Revenue Service amended the tax code related to the Child Dependency Exemption Deduction. Being able to claim the exemption for your dependent child has many significant tax advantages to the parent claiming the exemption. It is important to understand the summarized rule changes below, so as to not jeopardize your position if you are the parent entitled to claim this valuable exemption.

The changes to the tax code can be summarized as follows:

1. The custodial parent is the parent with whom the child resides the greater number of nights during the year. The non-custodial parent is the parent with whom the child lived with the minority (less than 50%) part of the year. This definition will be used for tax purposes regardless of what the divorce decree may state.

2. You must obtain IRS Form 8332 (Release of Claim to Exemption for Child of Divorce or Divorced Parents) to claim the exemption if you are the non-custodial parent. A divorce agreement or court order can no longer be used to substitute for IRS Form 8332.

If you able to claim your child as a “qualifying child” for the dependency exemption, you may be eligible for the following tax benefits:

Whether you can take advantage of these credits and the amount of the credits varies depending upon your financial situation. For example, some of these credits phase out at higher income levels making them more valuable to low and middle income filers. As you can see, the tax benefits of being able to claim your child for the Dependent Exemption can be financially advantageous from a tax standpoint. We recommend that you meet with a qualified tax advisor to understand the impact of the financial / tax advantages or disadvantages prior to finalizing your divorce.

For divorcees in the year 2009 and after, if you are going to be considered the non-custodial parent, it is important to follow the IRS guidelines and make sure you include a provision within your divorce decree to obtain a completed IRS Form 8332 from the custodial parent for each child for one or more future tax years. We recommend that you execute this as part of the settlement process. It is often difficult to get an ex-spouse to sign-off on papers after the fact.

If you are interested in additional divorce tips and strategies, please download our eBook: The Financial Divorce – Your Guide to Financial Divorce Knowledge.

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