Dependent care expenses - who can claim what?

[FEDUKE404]

Need a confirmation (lecture will be fine ) re recently divorced clients with allowable dependent care expenses.

Facts: H/W are legally divorced, finalized in court last summer. Per divorce decree, H will always be allowed to claim the personal exemption for child. (I imagine Form 8332 will come into play, as it appears I will be doing tax returns for both parents although they both are fully aware of my need to avoid any potential conflict of interest situations that might arise. None are expected, as it is an amicable divorce.) Depending on circumstances, the HOH status may switch each year due to timing issues. Obviously only one of the two can annually claim HOH and the other is then stuck with single.

Both parents pay for "their" dependent care expenses, i.e. while the child resides with them. The H (only) also has DCB withheld via payroll. His income far exceeds that of his former wife. I have explained to H how it is possible for "sheltered" DCB amounts as shown on Box 10 of Form W2 to turn into taxable income for him. As early as last spring, I had discussions with the husband urging that his/their attorney be diligent in applying the correct "verbiage" for the upcoming divorce legal paperwork. I am certain that was handled appropriately.

So, here is my specific question: Since both parents have apparently already paid dependent care expenses in 2012, is it "all or none" for one of them (limited of course to what each "paid") or is it possible for BOTH of the parents to claim (via Form 2441) "their" dependent care expenses via Form 2441??

Yes, I'm getting tripped up per the constraints of "custodial parent" as referenced on Page 4 of Publication 503. There is no conflict with the child falling into the "qualifying individual" category.

Even though my morning coffee seems to have kicked in, I'm not quite sure of the correct answer. My gut feeling is there will be a "Form 2441 winner" and a loser here, versus two winners.

Guidance will be appreciated.

FE

[New York Enrolled Agent]

So, here is my specific question: Since both parents have apparently already paid dependent care expenses in 2012, is it "all or none" for one of them (limited of course to what each "paid") or is it possible for BOTH of the parents to claim (via Form 2441) "their" dependent care expenses via Form 2441??

Yes, I'm getting tripped up per the constraints of "custodial parent" as referenced on Page 4 of Publication 503. There is no conflict with the child falling into the "qualifying individual" category.
FE

I think IRS Notice 2006-86 answers your question.

If §152(e) applies, a child may be treated as the qualifying child of two taxpayers. A noncustodial parent may claim the child as a qualifying child under §152(e) only for purposes of the child tax credit under § 24 and the dependency deduction under § 151. However, the noncustodial parent may not claim the child as a qualifying child under § 152(e) in determining head of household filing status under §2(b), the earned income credit under § 32, the child and dependent care credit under § 21, or the exclusion from income for dependent care assistance under § 129. Only the custodial parent (or other eligible taxpayer) may claim the child as a qualifying child for those purposes.

[FEDUKE404]

Win and lose

I think IRS Notice 2006-86 answers your question.

If §152(e) applies, a child may be treated as the qualifying child of two taxpayers. A noncustodial parent may claim the child as a qualifying child under §152(e) only for purposes of the child tax credit under § 24 and the dependency deduction under § 151. However, the noncustodial parent may not claim the child as a qualifying child under § 152(e) in determining head of household filing status under §2(b), the earned income credit under § 32, the child and dependent care credit under § 21, or the exclusion from income for dependent care assistance under § 129. Only the custodial parent (or other eligible taxpayer) may claim the child as a qualifying child for those purposes.

To be sure I'm on the path here:

For purposes of the exemption and child tax credit issues, those are paired and go with the person (always husband in this case) who "claims" the child via divorce decree.

For purposes of dependent care credit, for all intents and purposes the person "winning" the HOH battle also gets to claim the dependent care credits only paid by that person. (Anything paid for dependent care expenses by the other spouse for the same individual is simply lost.)

And in this case, IF the wife does win the 2012 HOH skirmish, due to time in residence, the husband with the dependent care benefits (tax saving) shown on his W2 will not have any Form 2441 to file ("prove his innocence") and thus ALL of those "pre-tax" benefits revert to fully taxable income via the Form 1040 line 7 plus "DCB" annotation.

Suggestions for this couple? It may be difficult to "predict" the >6 months issues, so perhaps have husband reconsider the DCB route and just deal with a "regular" Form 2441 if such legitimate expenses do arise? They fully expect about equal time, and I doubt if the "same amount of time" rule tiebreaker is very relevant in the real world. His income is fairly high.

Thanks for the input.

FE

[BP.]

Suggestions for this couple? It may be difficult to "predict" the >6 months issues, so perhaps have husband reconsider the DCB route and just deal with a "regular" Form 2441 if such legitimate expenses do arise?

Since you say it'll be difficult to predict just which years the husband will be deemed the custodial parent (i.e. had child more than half the year) one strategy would be to continue the DCB exclusion from payroll, add in to taxable income when required, but still save FICA & Medicare on the exclusion. See TTB 11-4.

[New York Enrolled Agent]

To be sure I'm on the path here:

For purposes of the exemption and child tax credit issues, those are paired and go with the person (always husband in this case) who "claims" the child via divorce decree.

FE

No - the divorce decree cannot be used to determine which parent gets the "child".

From the preamble in TD 9408 which created the final regulations for §152(e)

Definition of Custodial Parent

The proposed regulations define custodial parent as the parent with whom the child resides for the greater number of nights during the calendar year (the counting nights rule) and include rules for allocating nights when the child resides with neither parent.

Later we find:
Divorce decrees, separation agreements, and similar instruments are complex documents that may be subject to differing interpretations governed by state law. Allowing these documents to serve as a written declaration creates complexity and uncertainty. Therefore, the final regulations retain the rule that a written declaration not on Form 8332 (or successor form) must conform to the substance of Form 8332, and further provide that a release not on a Form 8332 must be a document executed for the sole purpose of releasing the claim. The final regulations provide specifically that a court order or decree or a separation agreement may not serve as the written declaration. These rules will improve tax administration and reduce controversy.

For argument's sake, suppose the child spent 200 nights with mom - regardless of what the decree says, mom is entitled to the exemption as the custodial parent unless mom waives the exemption as per Form 8332. However, assuming the 200 days again and mom releases the exemption, Notice 2006-86 says dad still could not use Form 2441 as he is not the custodial parent. If the parents have joint custody, they will need to keep track of the nights. You are right - let the skirmish begin.

[FEDUKE404]

Getting the verbiage correct

No - the divorce decree cannot be used to determine which parent gets the "child".

From the preamble in TD 9408 which created the final regulations for §152(e)

Definition of Custodial Parent

The proposed regulations define custodial parent as the parent with whom the child resides for the greater number of nights during the calendar year (the counting nights rule) and include rules for allocating nights when the child resides with neither parent.

Later we find:
Divorce decrees, separation agreements, and similar instruments are complex documents that may be subject to differing interpretations governed by state law. Allowing these documents to serve as a written declaration creates complexity and uncertainty. Therefore, the final regulations retain the rule that a written declaration not on Form 8332 (or successor form) must conform to the substance of Form 8332, and further provide that a release not on a Form 8332 must be a document executed for the sole purpose of releasing the claim. The final regulations provide specifically that a court order or decree or a separation agreement may not serve as the written declaration. These rules will improve tax administration and reduce controversy.

For argument's sake, suppose the child spent 200 nights with mom - regardless of what the decree says, mom is entitled to the exemption as the custodial parent unless mom waives the exemption as per Form 8332. However, assuming the 200 days again and mom releases the exemption, Notice 2006-86 says dad still could not use Form 2441 as he is not the custodial parent. If the parents have joint custody, they will need to keep track of the nights. You are right - let the skirmish begin.

My comment re "who gets the child" was referring ONLY to the divorce decree that allows the H to claim the personal exemption as determined/agreed to along with asset splitting et al by the parties at the time the separation/divorce legal papers were prepared.

Any comments on custodial parent issues are separate. I have neither the skills nor experience to delve deeply into legal matters that could have occurred here. (Are you an attorney?) In any case, I'm certain the divorced couple and their respective attorneys had extensive conversations of this type previously.

My take on the situation is:

1) The mother will NEVER get the personal exemption, and based upon "nights under the roof" issues will either file as S for failing the test or HOH for meeting the test via the qualifying child test but not as a dependent rule. If the tests are met, she can use only the dependent care expenses she paid.
2) The father will ALWAYS get the personal exemption, and based upon "nights under the roof" issues will either file as S for failing the test or HOH for meeting the test via the qualifying child test as well as the dependent rule. If the tests are met, he can use only the dependent care expenses he paid.
3) For the parent who does not qualify for filing Form 2441, any dependent care expenses paid by that parent are essentially lost. If a DCB program with employer was in place, those "expenses" automatically revert to taxable income via instructions for line 7 of Form 1040.

As for the father (or even mother?) for that matter continuing payroll DCB, that might require a large grain of sand. Both parents have income sufficient that there would be no FICA saving (already maxed out either way) and the Medicare tax savings would be minimal. But I like the thinking!!

FE

[Burke]

My comment re "who gets the child" was referring ONLY to the divorce decree that allows the H to claim the personal exemption as determined/agreed to along with asset splitting et al by the parties at the time the separation/divorce legal papers were prepared.

My take on the situation is:

1) The mother will NEVER get the personal exemption,....
2) The father will ALWAYS get the personal exemption,...
FE

But, as the post from NYEA stated per IRS ruling, this might not be the case -- as it does not matter what the divorce decree says. The form 8332 will control release of exemption from custodial parent (in the year[s] the mother might qualify.)

[FEDUKE404]

Dealing with exemption issue

But, as the post from NYEA stated per IRS ruling, this might not be the case -- as it does not matter what the divorce decree says. The form 8332 will control release of exemption from custodial parent (in the year[s] the mother might qualify.)

That is not going to be a problem with couple.....I feel sure any issues re personal exemption/Form 8332 will be handled appropriately.

My original question was solely about dependent care issues. Was hoping some way (2012) expenditures of both parents could be claimed...but it appears not.

Fortunately this is early Feb, so perhaps for 2013 the parties involved can take different approaches to who pays what when.

FE