When parents divorce, one of the often-overlooked issues is who gets to claim the children as dependents on their tax returns. While this might seem like a minor detail compared to custody schedules and child support calculations, the financial impact can be significant.
The IRS Rules for Claiming Dependents
The IRS has specific rules about who can claim a child as a dependent, and these rules apply regardless of what your divorce decree says. Understanding these rules is essential for divorced parents in Maryland.
The Custodial Parent Rule
Under IRS rules, the parent who has physical custody of the child for the greater part of the year (more than half the nights) is generally entitled to claim the child as a dependent. This is known as the “custodial parent” for tax purposes.
Key points to understand:
- Physical custody for tax purposes may differ from legal custody
- The count is based on where the child sleeps most nights
- Temporary absences (camp, school trips) count toward the parent’s time
The Tiebreaker Rules
If custody is exactly 50/50, the IRS applies tiebreaker rules:
- The parent with whom the child lived more during the year
- If equal time, the parent with the higher adjusted gross income
Transferring the Dependency Exemption
The custodial parent can transfer the right to claim the child to the non-custodial parent by completing IRS Form 8332. This form must be signed by the custodial parent and attached to the non-custodial parent’s tax return.
Important considerations:
- Form 8332 can be for a single year or multiple years
- The form can be revoked, but only for future years
- The form only transfers the dependency exemption, not other tax benefits
What Can Each Parent Claim?
The Custodial Parent Can Claim:
- Head of Household filing status (if qualifying)
- Child and Dependent Care Credit
- Earned Income Tax Credit
- The dependency exemption (unless released via Form 8332)
The Non-Custodial Parent Can Claim (if Form 8332 is signed):
- The dependency exemption
- Child Tax Credit
Including Tax Provisions in Your Agreement
Many divorcing parents overlook tax issues when drafting their marital settlement agreement. However, addressing these matters upfront can prevent costly disputes later.
Consider including provisions for:
- Who claims which children - If you have multiple children, you might alternate or split
- Alternating years - Some couples take turns claiming the dependency exemption
- Conditional release - Tying the release to current child support payments
- True-up provisions - Adjusting other financial terms to reflect tax benefits
Common Mistakes to Avoid
1. Assuming Your Agreement Overrides IRS Rules
Your divorce decree doesn’t bind the IRS. If you don’t follow IRS rules and complete the required forms, you could face penalties or have your deduction denied.
2. Both Parents Claiming the Same Child
If both parents claim the same child, the IRS will likely flag both returns. This can delay refunds and trigger audits.
3. Not Updating Arrangements When Circumstances Change
If custody arrangements change significantly, your tax arrangements may need to change as well.
4. Forgetting to Sign Form 8332
Even if your agreement says the non-custodial parent can claim the child, the IRS requires the proper form to be signed each year (or for multiple years if specified).
Getting Professional Help
Tax issues in divorce can be complex, and mistakes can be expensive. At Leffler, Bayoumi & Oliver, we help clients address these financial details as part of comprehensive divorce planning. We work with tax professionals when needed to ensure our clients’ agreements are both legally sound and tax-efficient.
If you’re going through a divorce and have questions about how children will be claimed on taxes, or if you’re experiencing a dispute about tax deductions, contact our office to schedule a consultation.
Note: Tax laws change frequently. The information in this article is for general educational purposes. Please consult with a tax professional or attorney for advice specific to your situation.
Need Legal Assistance?
If you have questions about this topic or need legal representation, our experienced attorneys are here to help. We work with clients throughout Maryland to provide practical guidance and effective advocacy.
Contact us to discuss your situation and learn how we can assist you.