Non-custodial, biological parent has an FSA account for our children which was used for his portion of the child care in 2016.

[jpowers28]

Non-custodial, biological parent has an FSA account for our children which was used for his portion of the child care in 2016. However, I claimed both children as dependents since I had them more than 50% of the time and all documentation shows that I paid for their expenses. His tax return was flagged because "someone else claimed childcare expenses for one of the kid's social security number and that conflicts with the 5,000 in pretax income in child care FSA he has" and he wants me to talk to my CPA on how to fix it. I believe this is his issue to fix, not mine.

edit:  His argument is that the children lived with him at least 50% of the time in 2016 since we were together for 11 months of that year. However, we agreed in the beginning of that year that I would claim HoH, child care credit, etc since we both had similar incomes. I had primary custody the last month of 2016.

[Critter]

Generally, only the custodial parent is eligible to claim the following tax breaks:
• the dependent's personal exemption
• head of household filing status (if applicable)
• child and dependent care tax credit  ***
• child tax credit and additional child tax credit
• earned income tax credit, and
• exclusion for dependent care benefits


However, the custodial parent can waive his or her right to claim a dependent in favor of the non-custodial parent. The non-custodial parent would then be able to claim:
• the dependent's personal exemption,
• child tax credit and additional child tax credit, and
• tuition and fees deduction or the education tax credits

[Opus 17 · Accepted solution]

Yes, it is his issue.  He can't claim a tax break using an FSA unless the child(ren) physically live with him more than half the year, no matter what agreements you might have regarding sharing the dependent exemption and child tax credit. (The dependent exemption and child tax credit can be released to the non-custodial parent if your agreement calls for that, but only the custodial parent can use a dependent care FSA.)

The income gets added back to his taxable income on line 7 and he pays regular income tax on it.  Fortunately there is no additional penalty.

[jpowers28]

His argument is that the children lived with him at least 50% of the time in 2016 since we were together for 11 months of that year. However, we agreed in the beginning of that year that I would claim HoH, child care credit, etc since we both had similar incomes. I had primary custody the last month of 2016.

[Opus 17]

It sounds like he doesn't agree any more.

Only the custodial parent can claim HOH and the child care credit.  Using an FSA follows the same rules as the child care credit.

In your situation the first tie breaker is total # of days.  Where did the children live the final month?  For example, if they lived with him weekends in December, they might have lived 340 days with your ex but 350 days with you. That makes you the custodial parent.  

(If the # of days is exactly equal, the second tie breaker goes to the parent with the higher gross income.)

See here under "special rule for children of divorced or separated parents."  <a rel="nofollow" target="_blank" href="https://www.irs.gov/forms-pubs/about-publication-501">https://www.irs.gov/forms-pubs/about-publicati...>

[jpowers28]

UPDATE: He is now saying that his CPA want me to file an amendment to my return to not claim the credit which would make me owe $600 and he would reimburse me. That makes no sense to me and seems a bit suspicious. Thoughts and advice welcomed!

[Opus 17]

If you had custody more actual days than him,, and you can prove it, there is no reason for you to file an amended return and anything he or his CPA wants you to do may violate the law.  You may need to get your attorney (if you have one, and if they actually understand these tax issues which some don't) to get involved.

If you had custody more days than him, you are the only parent entitled to claim the child as a dependent.

You can sign a release form that allows the other parent to claim the dependent exemption and child tax credit.  This will cost you a variable amount of money depending on your overall tax situation.  Some custody orders require the custodial parent to release the dependent exemption, for example every other year.  The IRS does not get involved in enforcing custody orders.  If you have such an order in place and you don't sign the release form, the IRS will not take action.  The other parent might be able to get the family court to order you to sign under threat of contempt, but the IRS won't enforce the order, and the non-custodial parent can claim nothing without the release.

If you don't have a custody order or the order is silent on the subject of the dependents, then there is no reason to sign the release unless you are feeling generous.  If you did sign a release for 2016, you would have to go back and amend your return to reflect that fact.

But, even if you sign the release, it will only entitle the other parent to the child tax credit and the dependent exemption.  The ability to use a tax-free FSA for child care expenses always stays with the custodial parent and can't be waived, released or transferred.  (Likewise, the ability to qualify for head of household status and EIC also always stays with the custodial parent and can't be transferred, waived or released.)

The only way he could claim the tax-free benefit of the FSA is if you completely removed the child from your tax return.  (It should cost you a lot more than $600 unless you are in a fairly unusual situation.)  Then he could file as if he was the custodial parent.  I don't think you would be breaking any laws but he and his CPA would be.

Unless the CPA asked you to sign a release form, they are probably trying to file falsely.  (Does he really have a CPA who is advising him to file a false tax return, or just he just say he has a CPA to try and convince you.  Have you ever seen this person?)

If the CPA did ask you to sign a Form 8332 release, then it may be the case that they are planning to file honestly and he will save more than you lose and is willing to make it up to you.  But that won't cover the FSA.  It would give him the exemption and the child tax credit only.

[TaxGuyBill]

@Opus 17   If both parents had the child for over 50% of the year, EITHER parent has the ability to claim the child, and Form 8332 is not necessary unless the OP claims HOH, EIC, and the Child Care Credit and gives the Exemption and Child Tax Credit to the other parent.

If both try to 'fully' claim the child (without splitting things with a 8332), the OP will 'win' because the child lived with the OP more than the other parent.


@jpowers28   Are you allowing him to claim one or both children's Exemption and the Child Tax Credit?  Do you qualify for the Earned Income Credit?  When doing the math, did YOU pay for over 50% of the cost of keeping up a home during the year for kids (to qualify for Head of Household)?  Or did the other parent pay for most of that while you were living together?

[jpowers28]

I claimed everything and paid for more than 50%. He was using the FSA to offset his portion.

[TaxGuyBill]

Unless you allow him to 'fully' claim the child (including the Exemption and Child Tax Credit), it would not benefit the other parent if you did not claim the Child Care.  He still would not be able to claim the Child Care unless you allow him to 'fully' claim the child.

[jpowers28]

That's what I thought. Thank you guys so much for the clarification!

[TaxGuyBill]

You do have the OPTION to let him fully claim one or both children.  Because of the FSA and because you both have similar incomes, it would probably result in the best OVERALL refund (between the two of you) if you allowed him to fully claim one of the children.

Besides the Child Care Credit (usually $600 per child), you would lose the exemption (usually $600-$1000, plus State) and the Child Tax Credit (usually $1000).  He would then gain those, but his Child Care Credit/FSA would be likely be higher than $600.

You could 'test it out' and start to amend to see how much you would lose.  You could then ask for that amount from the other parent.

On the other hand, it may be more work than it is worth.  Also, I wouldn't recommend starting to amend your Online tax return unless you were actually going to amend (with the CD/downloaded version, you can 'Save As' a new file, so you keep your original file, but the Online version would overwrite your original information).

[Opus 17]

Yes, my mistake.  When you both qualify due to more than half the year, then either one can choose to claim the dependent and no forms are needed.  If you disagree on who should claim the dependent and both of you claim them, the IRS will give it to you due to the tiebreaker rule.

There are actually a large number of options here.  With respect to each child, you have 4 ways to file:

1. You claim full dependent, he gets no benefits (he can't use the FSA).
2. You claim custodial dependent for HOH but sign a form 8332 releasing the dependent exemption and child tax credit to him.  (He still can't use the FSA.)
3. He claims full dependent (he can use the FSA).
4. He claims custodial dependent for FSA and gives you a signed release form allowing you to claim the dependent exemption and child tax credit.

#3 or #4 allow him to use the FSA, but will cost you some money.  How much is impossible to say.

Depending on the actual care costs and children's ages, he may get a large benefit from claiming at least one child but a much smaller additional benefit for claiming the second child.

Then the question is how to make you whole when you amend.  (If you decide to amend, don't agree on a dollar amount until after you prepare the amended return and see what the impact on you will really be.)

You may want some help from someone who can sit down with you and your ex in person.  There are free volunteer tax services for low income taxpayers all over the country, if you don't want to pay for your own advisor.

[Critter]

But the bottom line is the custodial parent issue ... if they didn't live with him more than 1/2 the year then his options are limited and neither include the FSA issue.   The only way for that to work is for the child to physically stay with him more than 1/2 the year so he becomes the custodial parent for that tax year.  I know it is easy to just agree to I claim one & you claim 1 however that usually blows up in the non custodial parent's face later down the road if other issues arise then this false filings can be brought to light.  When it comes to the IRS and a divorce situation it is wise to make very sure you are standing on firm ground when the quake hits.