Deductions & credits

Here's a "very rough" outline of how it works with dependents of separated/divorced parents. This boiler is from a few years ago, it is "NOT" all inclusive and I'm not sure that all information provided is 100% accurate. But it "should" be close enough to help the reader out.

Divorced/Separated parents claiming dependents.

When you have a situation where the parents of a qualifying dependent child are divorced or separated, there are IRS rules that must be followed to determine which parent can claim the child as a dependent on their tax return. These rules are established by federal law and cannot be over-ridden by any judge below a federal judge. Since federal judges do not deal with divorce or custody cases, that will just never happen. So regardless of what any court order you have may say, it just flat out does not apply to your federal tax return. Depending on your specific and explicit situation, it may apply to your state return.  But that’s extremely rare since such cases are handled by county or lower level courts and not state courts.

So when it comes to your federal tax return, what your court order may say just flat out does not apply and does not matter. There are no exceptions. Here’s how it works with your federal return. Read all the below, because the oxymoronic ruleset applies here.

First, the IRS has clear cut definitions you have to know.

Custodial Parent – This is the parent with whom the child lived for more than 182 nights of the tax year. The nights do not have to be consecutive. Temporary absences for things such as hospital stays, spending the night with friends, away for school, etc count as a night spent with the custodial parent. In a case where the separation occurred during the year and the child did not stay exclusively with either parent for more than 182 nights, then the custodial parent is the parent with whom the child stayed the most nights during the tax year. In case of a tie, the custodial parent is the parent with the highest AGI.

Non-custodial Parent – This is the parent that does not meet the requirements to qualify as the custodial parent.

The custodial parent can relinquish their right to claim the child to the non-custodial parent for a specified number of tax years by completing IRS Form 8332 and providing it to the non-custodial parent. The non-custodial parent will need to keep this form on file for 3 years or until the child no longer qualifies as a dependent – whichever occurs last. If audited and requested by the IRS, the non-custodial parent will need to provide a copy of the form to the IRS. If the non-custodial parent does not provide a copy of the form to the IRS upon their request, then the dependent child tax credit will be revoked and the non-custodial parent will have to pay it back to the IRS with interest, and possibly with fines and penalties too.

In cases where a judge below the federal level has ordered the parents to swap claiming the child each year, the IRS does not and will not recognize that order, as it goes against federal law. However, that lower level judge can legally order the custodial parent to complete and sign the 8332. If the custodial parent refuses the sign the 8332 then the judge can find that parent in contempt of court and take whatever legal actions allowed against that custodial parent for not following a legal order by not signing or refusing to sign the form 8332. The bottom line here is, without a signed form 8332 the non-custodial parent just flat out can not legally claim the child as a dependent on the non-custodial parent’s tax return.

One final thing to note: The federally recognized custodial parent is the one who claims the EIC for the child. The non-custodial parent can not claim the EIC no matter what. In this case, the custodial parent would still enter the child in the dependent’s section and after working through the menus correctly they would appear with a status of non-dependent on the custodial parent’s tax return. Thus, qualifying them for the EIC for the child which they are legally entitled to even though they signed the 8332 giving dependent rights for that tax year to the non-custodial parent.