Tax Tips and Tidbits

March 1, 2017

By Steven R. Anderson E.A.

This week our subject is about Divorce, Tax, and Children.

Here’s a true story about a taxpayer who seemed to do everything right, but still ended up on the wrong side of the tax law.  Of course, the names have been changed.

Roy and his wife Norma were divorced in 2014.  They came to what they felt was a fair settlement.  Their divorce decree stated that while their two children would reside with Norma, they would both have a say in the kids upbringing.  Roy agreed to pay what the couple considered a reasonable amount for child support.  In exchange, the decree stated that as long as Roy paid the child support on time, he would be allowed to claim the exemptions for his 2 kids on his tax return.

Well, all of 2015 went by, and Roy made every child support payment on time.  When tax time came, Norma informed Roy that she was going to claim the children, and refused to release the exemptions.  Roy filed his return, claimed the children like the decree said he was entitled to, and even attached a copy of the decree to his return.

This IRS denied him the exemptions.

He appealed.

He lost.

He went to tax court.

He lost.

Why?  Let me explain.  Federal tax law states that, assuming all other tests are met, the parent with whom the child resided for the longest period of time during the year is entitled to the exemption.  We’re not talking legal custody here, we’re talking about physical custody.  In Roy’s case, the children resided with Norma.

What about the divorce decree?  Again, Federal tax law states that the custodial parent can release the exemption, and the non-custodial parent can claim the exemption if all of the following are true:

  1. The parents are divorced, legally separated, or lived apart at all times during the last 6 months of the year.
  2. The child received over half his or her support from the parents.
  3. The child is in the custody of one or both parents for more than half the year.
  4. The custodial parent signs form 8332 stating that he or she will not claim the child as a dependent for the tax year.
  5. The non-custodial parent attached form 8332 to the tax return.

Roy’s problem was that he didn’t meet the last two requirements.  Norma did not sign a form 8332, and while Roy attached the divorce decree, it was not a form 8332.  In addition, the decree stated that Roy could claim the exemption IF he was current on the child support.  Roy presented the tax court with proof that he complied.  While the court sympathized with Roy’s situation, the decree, issued by a State authority, could not override Federal law.  The exemptions, and the related benefits, were denied.

Roy’s only option would be to take Norma back to the local court and sue for damages there.

Roy’s case may be extreme in the fact that Norma refused to comply with the local Judge’s order, but it does show that local law cannot override federal law.

Our next article will cover more details about Divorce, Children and Taxes.

 

Steven Anderson is an Enrolled Agent, licensed to practice before the IRS.  He is the owner of the Beacon and Pawling franchises of H&R Block where he holds a Master Tax Advisor certification and has 27+ years of experience.  Steve is also a graduate of the National Tax Practice Institute and a member of the American Society of Tax Problem Solvers, with specialization in collection cases.