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US Taxes & the Child Dependency Exemption

US Taxes & the Child Dependency Exemption
Ines Zemelman, EA
30 November 2016

The following article will discuss the requirements that must be met in order to claim children as dependents, and requirements if non-custodial parents want to claim the exemption.

We will also discuss the rules for “breaking ties”, how custodial parents can voluntarily release the exemption to the other parent and also a recent decision by the Tax Court that considered this issue.

What are the Requirements to Claim the Exemption?

A taxpayer must meet all the following requirements, or the IRS will disallow the exemption. The child that is being claimed as a dependent must:

1. Have resided with the taxpayer over half of the year. Absences of a temporary nature (such as being away for school) do not get considered. The exemption can be claimed for children born within the tax year if that child was living with the taxpayer after being born for more than half of the remainder of that year. Children who are stillborn cannot be claimed, but children who lived for even a moment outside the womb do qualify.

2. Have been under the age of 19 as of December 31. (Birth date is considered as December 31 when born January 1.) The age is 24 for a child who is a student full time (according to school rules), for at least five months out of the year. These do not need to be consecutive.

3. Be younger in age than the person claiming the exemption, including a spouse if filing jointly. These age requirements are not applicable to a child who is totally and permanently disabled.

4. Not have provided over half of their support themselves. The parents are not required to provide over half the support of the child. This tests only for relatives who are being claimed. The definition of support includes things like room and board both at home and at school, health care, education expenses, clothing, transportation costs (cars must have been registered under the name of the child’s), expenses for operating a car that is registered to the parents, equipment for recreation and athletic events, wedding expenses, entertainment, music and dancing lessons, musical instruments, and summer camp. Included in the child’s support are savings as well as other income (like social security and other government payments), if the money is spent by the child themselves for purposes of supporting themselves.

5. Have their social security number or taxpayer identification number (for non-resident and resident aliens) reported on the income tax return. Without this number, the IRS disallows the exemption.

6. Not file a return jointly if they are married, unless it is filed only to get a refund when no taxes are due.

7. Be a citizen of the US, a resident alien, resident of Mexico or Canada, a United States national owing allegiance to US (a person born within the North Mariana Islands or American Samoa who isn’t a naturalized citizen of the US).

What is not Considered Support the Child Provides?

These things are not considered to be support that is provided by the child.

- Taxes (social security, federal, state, and local) if the child pays them from income they earned.

- Funeral expenses

- Medicare Parts A & B. Medicaid is not considered support according to a Tax Court ruling.

- Health insurance benefits that the child receives

- Scholarships, if they are a student full time for a minimum of 5 months in the year. When this 5 month requirement is not met, the scholarship is considered support that the child provides. War Orphans Educational Assistance Act payments, and ROTC payments are treated as scholarships, not support. Any state aid to disabled children for training or education, including housing and food, is considered a scholarship.

Rules for Breaking Ties

These rules are applicable when the qualifying tests above are all met by two or more taxpayers (for example, both a grandparent and a parent) who are otherwise eligible for the exemption. When one of these people is the child’s parent, then that parent is the one who qualifies for the exemption. But, the parent is able to allow a grandparent to use the exemption instead if the Adjusted Gross Income (AGI) of the grandparent is greater than that of the parent. If the grandparent’s AGI is less than the parent’s AGI, then only the child’s parents are able to claim this exemption.

These tie breaking rules state that the child is the dependent of whichever parent they lived with during the tax year the greatest amount of time. If the child lived with both parents an equal amount of time, the parent who has the greatest AGI is the one who is eligible for the exemption. This rule also applies to non-parents.

In cases where parents file separately, and who both meet the tests for qualifying for the exemption, and who cannot agree on who gets to claim this exemption, but who both claim the children, the IRS first determines if the parent who is non-custodial is able to claim the exemption using the rules applicable to separated and divorced parents (see below). If the rules for separated and divorced parents apply, then the tie breaking rules do not get considered.

Separated and Divorced Parents Special Rule

The parent who the child lived the greatest portion of the tax year is considered custodial. When the child has resided with both of the parents equally, the one with the greatest AGI is custodial. This parent is the one entitled to claim the exemption, although there is a rule that allows for the parent who is non-custodial to claim this exemption with the agreement of the parent who is custodial. It is necessary to meet these requirements:

- The child must receive over half of their support from either one or from both parents. This special rule is not applicable if one of the parents, or another individual, provides over 10% of support under multiple support agreements.

- The parents must be divorced (either separate maintenance agreements, or divorce decrees), legally separated, living under a written agreement of separation, or live separately for the final 6 months in the tax year.

- Either one parent or both of the parents must have custody for over half of the year.

How to Release this Exemption to Non-custodial Parents

Custodial parents can waive this exemption by filling out Form 8332. Non-custodial parents attach this form to their tax return. This form must stipulate the year(s) that it applies to. This waiver is not allowed to be conditioned on support payments or meeting other obligations. Custodial parents can revoke this waiver by completing Form 8332, Part 111. But, this revocation does not take effect until the tax year after it is delivered to the other parent, or reasonable attempts are made to deliver it. This revocation form is attached by custodial parents to their tax return each year that the exemption is claimed. State court divorce decrees that give this exemption to non-custodial parents are irrelevant (see below).

Separated or Divorced Parents Tax Court Ruling

Non-custodial parents cannot claim this exemption without the Form 8332, regardless of court orders - even when the custodial parents choose to ignore the court’s order. This situation was brought before the United States Tax Court when a non-custodial father claimed the exemption. A court in Florida had ordered the ex-wife to complete Form 8332, but she did not. The husband claimed the exemption anyway, but it was disallowed by the IRS, so the father appealed the case to the court. The court agreed with the IRS that the father was not able to claim the exemption without Form 8332, and further said that even court orders do not waive the right of custodial parents to claim this exemption. This is unfortunate since the father met all of his obligations imposed by the divorce court, but the tax law [Sect. 152(e)(2)] clearly states that the parent who is non-custodial cannot claim the exemption unless the parent who is custodial waives it.

Ines Zemelman, EA
founder of Taxes for Expats