Custody and Child Tax Credit

[JBA7]

Original Divorce in 2015 was based on Shared 50/50 custody and split the exemption for two children.  Father moved out of state in 2019, gave sole physical custody to mother.  The new custody and support agreement is silent on the tax issue.  Mother only signed 8232 for single year of 2015 but honored the 2015 agreement in 2016-2018 tax years as well.

Beginning in 2019, the children lived with the mother and the mother filed returns claiming both children.  She included a letter of explanation for 2019 and 2020 and a copy of the new custody agreement giving physical custody on July 17, 2019.

Father had filed early claiming one.  For 2021 tax year mother filed first and return was accepted electronically.  When father's 2021 filing was not accepted, he retained a lawyer and is likely going to ask the JDR court in Virginia to order her to sign an 8232,

She says he changed the custody, therefore the tax exemption sharing in the 2015 agreement no longer applies.  She does not want to hire an attorney and fight this, recognizing that a judge can do whatever he is persuaded is right.  Mediation may be an option but may end up back in court since she believes she is correct and shouldn't give up the exemptions/credits.

Any thoughts, comments and suggestions would be appreciated.

[Opus 17]

We can't talk about your legal situation, sorry.

Strictly on the tax laws, the IRS will only award the exemption to the parent where the child lives more than half the year, no matter what has been agreed to in court.  The IRS will not award the exemption to the non-custodial parent unless the custodial parents signs the release form 8232.  Of course, the state court can order you to sign the form.  You seem to be asking us for advice on whether or not you should sign the form, even though the court order is unclear?  We can't give legal advice.

From a tax point of view, you still qualify for head of household even if you sign form 8232.  For most tax years, you would be talking about the child tax credit which is a maximum of $2000.  For 2021, you are talking about the child tax credit which has a maximum of $3000, plus possibly the recovery rebate of $1400, so there is more incentive for your ex to fight, and more for you to lose (if you fight and lose) or to give up (if you voluntarily sign the form).  

The mother might fight for what is right.  The mother might offer to settle for a cash payment that splits the difference.  The father might want a declaration that the mother must sign the form every year, this might not be just about 2021.  The court might view the case differently in 2022 if the father has given up custody since 2015.  

Tough situation no matter what you do.  We would always advise you have your own representation, even though you said you didn't want to pay for it. 

[JBA7]

Thanks for the reply.  Trying to convince her to hire an attorney.   Otherwise she will be at the mercy of the County JDR judge.  I suppose she can appeal if it goes badly.

[Critter-3]

I agree legal council is best but read the original decree and the amended one.   Just because the changed agreement addressed the custody arrangements it sounds like it did not address the exemption situation ... so from what you are saying is that each parent is to claim one of the kids each tax year.   But the 8332 ONLY gives the non custodial parent the right to claim the exemption and the CTC.  The HOH filing status, day care credit & EIC still belongs to the custodial parent according to IRS rules which the state courts cannot override.  

[JBA7]

Thanks.  You have identified the crux of the issue.  The original mediated Property Settlement Agreement was based on splitting assets 50/50 and 50/50 shared custody down to details about days at each parents house, vacations, holidays, who lived in what school district, shared bank accounts, on and on.

It is a huge stretch to say the father can essentially blow up the 50/50 custody deal, leave town with his new wife and kid, cede physical custody to the mother, pay child support, etc. and still expect to get half of the tax credits for the kids he left behind.  

Furthermore, as I understand it, IRS doesn't care what it says--the non-custodial parent has to have an 8332.  He didn't ask for one ever until now when he realized it was going to cost him.  Unfortunately, this guy and his lawyer are asking the court to force her to sigh an 8332, and there is no reason to believe that the Domestic Relations court will do what is right or fair or obvious in my opinion.

Thoughts?

[Critter-3]

Sadly being forced to provide an 8332 to the non custodial parent is reasonable and within the right of the state court to require ... so I think the custodial parent needs to understand the IRS rules.  The state court can require the 8332 but cannot over ride IRS rules.  Go to court with the rules in hand ...

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). That can usually only occur if both parents lived with the child at the same time.   And yes they are that picky.

The custodial parent may claim everything child related  UNLESS they waive the dependency exemption to the non custodial parent via a form 8332.... in that case the child may be used on 2 separate returns but only in the following way :

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

See Special rule to divorced or separated parents (or parents who live apart) on page 32:
https://www.irs.gov/pub/irs-pdf/p17.pdf

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.

[Opus 17]

@JBA7 

It sounds like you now know the rules better than the ex.  If the ex claimed one child in the past without using form 8332, the only way that would go through the system is if the custodial parent had removed the child completely from their tax return.  That in turn might have deprived  the custodial parent of some tax benefits, although the effect would be less severe if the custodial parent had another child to claim. And if those tax returns are more than three years old, there is no way to go back and fix them.

Yes, the domestic relations court can order the custodial parent to sign a form 8332 for one year or indefinitely.  Whether or not the custodial parent has a convincing argument that the court should not do that would have to be determined by proper legal representation.

Form 8332 can only be used to transfer the child tax credit until the child turns 18.  After the child turns 18, the exemption can’t be transferred and where the child is a dependent is determined solely on the normal rules of custody and support.  So you need to weigh the cost of legal representation now against $2000 per year until the child turns 18 (however old they are now), and also factor in how badly you want to fight for a matter of principle.  The other parent has to consider the cost of their legal representation against the $2000 per year they would gain.  If the other parent is faithfully paying their child support obligation, one compromise that comes to mind is an offer to simply reduce the child support by $1000 per year or to rebate $1000 per year, which splits the difference and saves a court fight.  But I am not an attorney.

[JBA7]

Thanks to all for your thoughtful replies.  It is a very sad statement about the family court system that it would tolerate this egregious bullying of a mother putting her in a position costing thousands more if she fights it or thousands if she gives in.  There is a chance the judge would see this for the legalized extortion attempt that it truly is, but it may never get to that level because she is emotionally drained by the "legal" harassment by her ex and his lawyer over the last six weeks.  The negotiated approach seems worth considering, but the ex's nature is to be more interested in winning than compromising, especially if it hurts her, and even if it hurts the children.  

[Critter-3]

Sadly the original divorce decree allowed for the split on the dependency exemptions  so  I understand that even though he gave up custody he doesn't also want to give up the exemption that was already decreed.  Especially if he pays the child support timely.  Sometimes blowing into the wind is not worth the effort mentally or physically.

In the end the mother needs to be the bigger person and not nay say the dad in front of the kids.  Trust me they know what is happening even if you don't think they do and will think more of mom if she is kind hearted and forgiving.  If she does this she wins in the end where is counts. 

Last thought ... make sure he is paying his fair share of child support ... that is worth the cost of an attorney to get the amount adjusted if you believe he is under paying.