Can I claim my stepchild if my soon to be ex wife says no, despite paying the entire year's living expenses?

[niknak9281]

My wife and I are getting divorced, but it is not finalized and likely won't be until December or January.  She hasn't worked in almost 2 years, so I pay for all of her living expenses, including a side agreement with support money to last her until mid December so she has time to move, find a job, and start drawing paychecks 

This week, she decided to try and buck our agreement and threatened to have her brother, whom she and her child have never lived with or received any support from, claim them both so he can get the tax refund if I don't make adjustments in her favor above and beyond our previous arrangement.

Does she have the right to do that, or do I have the right to claim them both as she hasn't had a job and I paid for both of their expenses over this entire year?

[Hal_Al]

I'm of the opinion that you don't need form 8332, for 2016, since the child lived with you for more than half the year. All you need is for your wife to not claim the child.
The conflict will come if more than one person tries to claim the child. It's not entirely clear how the IRS will rule. Normally, the "tie-breaker", for parents, is who the child lived with the most time. But, in this case, the IRS will probably rule for you, because she had no income and no reason to file a return. If the brother tries to claim the child, the IRS will rule for you because you are the parent (step parent counts) and the child lived with you more than half the year and did not live with the uncle at all.
The way it works, If two taxpayers try to claim the same child, 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.

[bwa · Accepted solution]

Children's exemptions are based on custody, not support.

The minor child can be claimed by whichever spouse he/she lived with for more than 1/2 of the year.  For example, if you lived together until September, then she and your child lived elsewhere, the child would have lived with her for more than 1/2 of the year.  You could still claim the child as a dependent, but only with her consent on Form 8332.

If the child lived with both of you all year and you can't decide, the child would be claimed by the one with the higher income.

Notice that her brother doesn't enter into either scenario. 

(Note:  If you research the issue, a step child is treated exactly the same as your natural child.)

[niknak9281]

Yeah, basically, we split up in September, but I've paid all of the bills and support all along and I am continuing to pay her rent and bills until December, so she and the child lived with me for 9 months of the year.

[Hal_Al]

There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit and essentially no support test for a QC but there is an age limit. All that really matters is who the kid lives with. Only a QC qualifies a taxpayer for the Earned Income Credit and the Child Tax Credit.

Her brother cannot legally claim the child, as either a Qualifying child or a qualifying relative. To do so would be tax fraud. But the wishywashy defintion of a QC has many people believing that any close relative can claim a child. The rule is any close relative he lives with (and even then there are some technicalities).

[bwa]

Based on what you said, they lived with you 9 months of the year, and with her 12 months of the year.  That would make her the custodial parent and she would need to provide you with Form 8332 to transfer the exemption to you.  Again - who paid how much in support no longer plays any role in claiming children as dependents.  

However, that doesn't mean she can transfer the exemption to her brother.  The ability to transfer the exemption of a child comes under the "divorced or separated parent" rule, and her brother is neither.

[Hal_Al]

Also be advised that the stepchild relationship survives the divorce, for tax purposes. You can continue to claim the child, under the non custodial parent rules. Something to consider for the divorce negotiations.
 There is a special rule in the case of divorced & separated (including never married or step) parents. When the non-custodial parent is claiming the child as a dependent/exemption/child tax credit; the custodial parent is still allowed to claim the same child for Earned Income Credit, Head of Household filing status, and day care credit. This "splitting of the child" is not available to parents who lived together at any time during the last 6 months of the year; then only one of you can claim the child for any tax reasons. The tax benefits may not be split in any other manner.
Note in particular that the non-custodial parent can never claim the Earned Income Credit, Head of Household filing status or the day care credit, based on that child , even when the custodial parent has released the exemption to him.

[Hal_Al]

One more issue to consider in your negotiations: if the divorce is not finalized until next year (and there is no legal separation), you can still file as Married Filing Jointly, if you can get agreement. The tax savings could be significant enough to share.