IRS TAX EXEMPTION FOR CHILDREN AND DIVORCE AGREEMENTS

Posted on April 2, 2009 by David A. Gabay

 In 2008, the IRS amended Code Section 152(e), which addresses child dependency exemptions.  The changes affect the procedures and means for claiming the exemption. The new rules should be carefully followed to ensure that the exemption is taken by the parent entitled to it, and that the appropriate language is contained in divorce or separation agreements to reflect the current state of the law.

  1. A divorce agreement or court order can no longer be used as a substitute for Form 8332.  The parties must actually complete the form.
  2. Beginning in 2009, the custodial parent is the one with whom the child resides the greater number of nights during the year, regardless of the terms of the divorce decree. 
  3. Beginning in 2009, the custodial parent can unilaterally revoke the release of a child exemption for calendar years 2009 and beyond regardless of when the release was made.

In light of these developments, all non-custodial parents who plan to claim the exemption must obtain a signed Form 8332. In addition, divorce or separation agreements should address the potential for a release being improperly revoked after it is given. 

The parent claiming a dependency exemption is also entitled to benefit from a Child Tax Credit and any allowable Hope or LIfetime Learning Educational Tax Credits.  Keep in mind that the exemptions and credits are phased out as the income of the parent increases.  This should be factored into decisions as to when and how to claim the exemption.

For 2009, the Chidl Tax Credit phases out from $75,000.00 to $95,000.00 (of Adjusted Gross Income) and Hope or Lifetime Learning Educational Tax Credits phase out from $48,000.00 to $58,000.00 for single and head of household filers. These credits are generally more valuable to lower and middle income filers than the dependency exemption itself.

As with all tax issues in a divorce or separation agreement, you should consult an experienced tax attorney or accountant in order to full understand all of the ramifications of your agreement.

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