Q. Why does the tax law still allow her to claim him?
A. The tax law allows either the custodial or non-custodial parent to claim the child (the rules for divorced and separated parents). Period.
Since the law allows either, your real question is how to determine who will claim him. There are usually two ways to to that: 1. The two parents agree on how or 2. A judge orders how. Lacking any such agreement, you are correct; the parent the child lives with gets 1st choice.
So, the question is what does 'every year as allowed by law' mean? Until he no longer qualifies as a dependent or did The right to claim the dependent expire with the custody plan/agreement. That's why it's a legal question, not a tax question. My non-lawyer opinion is that it's until he no longer qualifies as a dependent.
"I feel due to the physical custody and my financial support, this allows me to claim him 100%." Financial support is meaningless. The IRS will allow you to claim him based on custody alone. The IRS doesn't care about the court order, unless it is dated before 2009. The IRS goes by it's own rules and will award the dependency to the custodial parent, if both parents try to claim the child. Her only remedy is to take you back to court for sanctions.
Since the custody changed near mid year, she may try to claim she was still custodial parent.
If someone else claimed your child inappropriately, and if they file first, your return will be rejected if e-filed. You would then need to file a return on paper, claiming the child as appropriate. The IRS will process your return and send you your refund, in the normal time. Shortly (up to a year) thereafter, you'll receive a letter from the IRS, stating that your child was claimed on another return. It will tell you that if you made a mistake to file an amended return and if you didn't make a mistake to do nothing. The other party will get the same letter you did. If one of you doesn't file an amended return, unclaiming the child, the next letter, from the IRS, will require you to provide proof. Be sure to reply in a timely manner.
Winner gets the tax benefits; loser gets to pay the IRS back with penalties and interest. The custodial parent almost always wins. The non-custodial parent can only claim the child as a dependent if the custodial parent gives permission (on form 8332) or if it's spelled out in a pre 2009 divorce decree.
Since she had custody for all the previous years, the burden of proof will, most likely be on you to prove you now have custody.
