There are special rules for divorced parents who claim the child dependency exemption and the child tax credit. The exemption is $3,650 for tax year 2009 and is adjusted upward for inflation in subsequent years. The exemption is phased out as income increases over the threshold of $250,000.00 on a joint return, $208,500 on a head of household return, $166,800 on a single return, and $125,100 on the return of a married person filing separately. The dependency exemption is not available to taxpayers subject to the Alternative Minimum Tax.
The parent entitled to the dependency exemption is also entitled to a $1,000.00 child tax credit which is phased out as income exceeds $110,000.00 on a joint return, return, $75,000 on a single return, and $55,000 for a married individual filing a separate return. The child tax credit is available even if the taxpayer is subject to the Alternative Minimum Tax.
As a general rule, the “custodial parent” claims the dependency exemption for a qualifying eligible child. The custodial parent for purposes of allocating the dependency exemption between divorced parents is the parent with whom the child spends more nights than the other parent during the tax year. The amount of time spent with a parent is determined by the number of nights spent with that parent. 26 USCA § 152(c)(4)(B)(i). If the child resided with both parents during the tax year for the same number of nights, the parent with the highest adjusted gross income gets the exemption. 26 USCA § 152(c)(4)(B)(ii).
The dependency exemption and the child tax credit can be shifted from one divorced parent to the other if statutory requirements are met. The statutory requirement can be met by executing IRC Form 8332 or the equivalent thereof. The courts have been very critical in their interpretation of whether an attempted transfer by parties who do not use Form 8332 in fact satisfies the “equivalent thereof” test. The better practice is to use the suggested form.
The rules related to allocation of dependency exemptions involve many exceptions and qualifications. It is recommended that divorced taxpayers discuss the dependency exemption and child tax credit allocation issue with a trusted family law attorney or tax advisor.
The IRS provides a useful publication which describes the rules related to allocation of the dependency exemptions and the child tax credit between divorced and separated taxpayers. IRS Publication 501, “Exemptions, Standard Deduction, and Filing Information” is available for download from the IRS web site (www.irs.gov).