The child dependency exemption is a valuable child-related tax benefit which needs to be considered in any divorce involving children. The dependency exemption will be worth a deduction of $3,900 in 2013, yet many lawyers overlook it during the divorce process. Most Texas divorce decrees fail to address the issue, leaving a potential dispute that lingers after your divorce is over.
A child can only be claimed as a dependent on one tax return for a given year. For divorced or separated parents, this means that only one parent can receive the tax benefit after separation. Generally, the custodial parent (or parent with whom the child lived the greater number of nights during the tax year) is entitled to claim the child as a dependent. However, the internal revenue code does permit the parents to allocate the dependent exemption to the noncustodial parent by agreement.
You can structure the agreement to allocate the dependent exemption in any number of ways. Some common options include: noncustodial parent claims all children every year moving forward; noncustodial parent claims children in even years, custodial parent claims in odd years; or perhaps noncustodial parent claims son and custodial parent claims daughter. No matter what agreement you reach, careful drafting of the divorce decree is essential. The decree must not only clearly allocate the benefit, but it must also create enforceable obligations for the custodial parent to execute the IRS Form 8332 for the year or years in question.
The IRS has changed the procedure for allocating the child dependent exemption several times over the years. It is no longer effective to simply attach a copy of the Divorce Decree to your tax return claiming the child. The IRS currently requires parents to execute IRS Form 8332, “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.” The executed form must then be attached and filed along with the parent’s tax return.
Post-judgment enforcement of a sloppy order may be tricky due to the intersection of Texas family law and Federal tax laws. To be sure you don’t run into any issues with enforceability, the Divorce Decree should describe in precise detail the manner of allocation of the dependent exemption. At a minimum, the Decree should specifically order the custodial parent to sign and deliver the IRS Form 8332 to the noncustodial parent. Whenever possible, the parties should complete the necessary IRS Forms prior to or contemporaneous with the signing and entry of the Decree.
Tax planning is a crucial, often overlooked facet of effective family law representation. Allocating the child dependency exemption is only one example of the tax implications of divorce. If you are facing the divorce process, it is essential that you hire a lawyer who gives due consideration to these issues.