Are you the parent that lived with the child more than half of 2016 or the parent that did not  with the child?   How you enter depends on that.

Custody is 50/50 so per our agreement and divorce decree we are supposed to alternate years

That wasn't the question.  The IRS does not honor state court custody orders -- the IRS makes its determination based on which parent the child lived with more than half the nights of the year.  That parent (the custodial parent) has certain rights.  The non-custodial parent has no rights to the child as a dependent unless the custodial parent signs a release form.  The non-custodial parent can't use the IRS to enforce a custody order or force the custodial parent to sign the release, but the non-custodial parent may be able to go to family court in their state to get an order for the custodial parent to sign the release.

Read more here, "children of divorced or separated parents". <a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/about-publication-501">https://www.irs.gov/uac/about-publication-501</a>

For more information see:

Custodial Parent
These are a paraphrase of the IRS rules for divorced or separated parents that live apart.

[Note: Unless the parents have been separated at all times during the last 6 months of the year, these rules do not apply.]

See “Children of divorced or separated parents or parents who live apart” in IRS Pub 17 for full information.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p17/ch03.html#en_US_2016_publink1000170897">https://www.irs.gov/pub...>

This assumes that the child is under age 18 (in most states).  Once the child becomes an adult (Emancipated child), custody becomes mute and these rules no longer apply.(See examples 5 & 6 in Pub 17 for more information)

There is no such thing in the Federal tax law as 50/50, split, or joint custody.  The IRS only recognizes physical custody (which parent the child lived with the greater part, but over half, of the tax year.  That parent is the custodial parent; the other parent is the noncustodial parent.)

Who can claim the exemption and credits depends on who is the custodial parent. (By the IRS definition of custodial parent for tax purposes - this is not the same as the custody that a court might grant.).

The test that the IRS uses to determine the custodial parent is where the child lived for more than 1/2 (or greater part) of the year. The IRS will go so far as to require counting the nights spend in each household - that person is the custodial parent for tax purposes (if exactly equal and more than 183 days - The custodial parent is the parent with the highest AGI, if less than 183 days then neither parent has custody so the child cannot be claimed by either parent). And yes they are that picky.

See Custodial parent and noncustodial parent  under the residency test in Pub 17

<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p17/ch03.html#en_US_2016_publink1000170897">https://www.irs.gov/pub...>
 
Only the Custodial parent can claim: (Child would be listed as non-dependent EIC & CC only)
-Head of Household
-Earned Income Credit
-Child Care Credit

The non custodial parent can only claim: (Child would be listed as dependent)
-The Exemption
-The Child Tax Credit

But only if specifically specified in a pre-2009 divorce decree, separation agreement or the custodial spouse releases the exemption with a signed 8332 form - after 2009 the IRS only accepts a signed 8332 form that must be attached to the non-custodial parents tax return.

Note. If you are filing your return electronically, you must file Form 8332 with Form 8453, (U.S. Individual Income Tax Transmittal) for an IRS e-file Return. See Form 8453 and its instructions for more details.  This must be done within 3 days of your e-filed return being accepted by the IRS.

This does NOT mean that the custodial parent can ignore any Decree or court order allowing the non-custodial parent to claim the exemption - they can be required to issue the 8332 form. They could be required by the court to do so or be in contempt.

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