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Dependent Child Tax Exemption

Posted Monday, January 7, 2013 by John S. Palmer

A noncustodial parent may claim a child as a dependent on his or her federal income tax return provided certain criteria are met.

If parents are divorced, legally separated, have a written separation agreement, or have lived separate and apart for the last six months of the calendar year, and the child has lived with one or both parents for more than half the year, Internal Revenue Code section 152(e)(2) permits a noncustodial parent to claim the dependent child exemption so long as:

(A) the custodial parent signs a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year, and

(B) the noncustodial parent attaches such written declaration to the noncustodial parent’s return for the taxable year beginning during such calendar year.

IRS form 8332 was developed to provide parents with a mechanism for complying with these provisions. It allows a custodial parent to waive the right to claim a child as a dependent for the current tax year and/or future tax years; and to revoke any prior waivers. Use of form 8332 is not mandatory; a noncustodial parent may use an alternative document so long as it conforms to the substance of form 8332.

The standard child support order in Washington contains a provision for allocating the dependent child exemption and includes language requiring the custodial parent to “sign the federal income tax dependency exemption waiver.” However, two US Tax Court decisions, both decided on December 19, 2012, illustrate that the IRS need only look to the federal tax code to determine if a noncustodial parent is entitled to claim the exemption, without regard to state law or the specific language included in a divorce decree or other state court order.

The first case (George v. Commissioner) involved a custodial parent who claimed a dependent child exemption and child tax credit for 2007 and 2008, despite having previously signed a form 8332 waiving the right to do so. She asserted that the tax court should find the waiver to be void on the grounds that a state court judge had erroneously ordered her to sign it and threatened her with contempt if she did not comply.

The tax court ruled against her, finding that Congress intended code section 152(e) to create a bright-line rule for the IRS to follow; to hold otherwise would undermine the intended certainty and clarity of section 152(e) and would “add great difficulty to the administration of the dependency exemption” by the IRS. Therefore, if the state court order was erroneous, the custodial parent’s remedy was with the state appellate court, not federal tax court, which Congress intended to insulate from child support disputes such as this.

The second case (Armstrong v. Commissioner) involved a noncustodial parent from Washington State who provided the IRS with a copy of a state court order entitling him to claim his son as a dependent if he was current on his child support obligation. Although it was undisputed that he was entitled to the exemption, his ex-wife did not provide him with a signed form 8332 as required by the court order.

The tax court found that the court order was not a valid alternative to form 8332, because the right to claim the exemption was conditioned on the father being current with his support obligation, whereas section 152(e) requires the custodial parent to unconditionally declare that he or she will not claim the child as a dependent. The tax court noted that by requiring this unconditional waiver by the custodial parent, Congress “removed from the equation the issue of proving support by the noncustodial parent.” The court also noted that proving compliance with support orders can be difficult, and the purpose of the bright-line rule created by section 152(e) is to avoid such problems:

We are obligated, however, to follow the statute as written, whether the resulting disadvantage is (as here) suffered by a noncustodial parent who bore the burden of child support but did not receive an executed Form 8332, or whether the disadvantage is suffered by a custodial parent who executed a Form 8332 but then bore an undue and unintended burden of child support.

The court was sympathetic to the father’s plight, however, and waived the 20% accuracy-related penalty on the grounds that he had a reasonable basis for claiming the dependency exemption and had acted in good faith.

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Law Office of John S. Palmer11911 NE 1st St, Ste. B204,Bellevue, WA 98005-3056