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Crazy rules and terminology regarding claiming dependents vis-a-vis Non-Resident Alien and Married Filing Separately status
I'm a US citizen married to a non-resident alien. We reside abroad, together, and have children who live with us. As my spouse has no desire or requirement to report anything to the IRS I have always filed as married/separately.
In most prior years I claimed our children as dependents. Recently, however, my spouse's income increased above mine. Now, TurboTax's interview suggests that, as a result, I cannot claim them as dependents unless I file a Form 8332 in which my spouse waives the right to claim them.
Form 8332 has language like custodial and non-custodial, which seems crazy to me because we are married, live together, and support the children together. My spouse simply now earns more than I do.
This distinction never really mattered before but it does now due to this stimulus payment and recovery credit business. So, it seems to me I now need to file a 1040X & 8332 for the prior year in which I did not claim the dependents, so that I can now, for 2020, claim them as dependents and obtain the full recovery rebate credit to which I'm entitled.
My spouse, however, may not like the notion of the term "non-custodial" being applied to them. For my part, I believe this is only intended in a tax sense, that it doesn't imply any actual custodial arrangement between us.
Have I understood the situation correctly as it applies to us?
We have never bothered to obtain a TIN for my spouse due to the hassle of doing so and there being no benefit to us. Now, of course, I'll have to submit a W-7 along with my prior-year 1040X, 8332, and current-year 1040.