Form 8332

[Koss]

I'm going to start a new thread and wade into the rather lively discussion started by Snaggletooth last week...

The basic rule--that the IRS will not honor a divorce decree unless it meets all the stringent requirements of Form 8332, and imposes no conditions on the transfer of the exemption--does not appear to have changed much over the years.

It does appear that the IRS is getting tougher on enforcing the requirements, and is not simply accepting hazy, faxed documents attached to the back of a return, or the bald assertion that the child "did not live with the taxpayer due to divorce," without any documentation to back it up. This is a very frequent mistake made by do-it-yourselfers and new preparers. You have to list the dependent as living with you or not living with you on line 6 of Form 1040. If you say the kid lived with you, it will likely conflict with the same assertion by the other parent; if you say the kid did not live with you, you need to attach Form 8332 or its equivalent. The IRS is catching more and more of these.

With that being said, there is one thing that may have changed dramatically, that was touched on very briefly in the earlier thread.

I've been told by fairly reliable sources that the IRS has effectively changed its interpretation of the term custodial parent.

Keep in mind that the entire mechanism behind Form 8332--namely, IRC Section 152(e), is based on the premise that in the absence of Form 8332, all of the tax related benefits automatically go to the custodial parent. 152(e) provides a way to "split the baby in half," transferring the exemption and the child tax credit, but none of the other benefits.

The transfer of benefits only goes in one direction--from the custodial parent to the non-custodial parent. The noncustodial parent cannot transfer benefits that they don't have to begin with.

And guess what? The "custodial parent" in the divorce decree may not be the custodial parent under federal tax law. The IRS appears to be taking the position, consistent with the code, that the custodial parent, by definition, is the parent with whom the child lived for more than half the year. The fact that the divorce decree may identify the other parent as the custodial parent is irrelevant.

The problem with this approach is that the tax law is still not keeping up with family structure in the 21st century, and with "shared parenting" and "joint custody," it is sometimes very difficult to determine with any certainty which parent really had the kid for more than half the year.

If they can't agree on how to file the return, the IRS can disallow all benefits for BOTH taxpayers, if neither one can establish that the child lived with them for more than half the year.

Burton M. Koss

[RLymanC]

Tie Breaker

Seems like the tie breaker should take effect in your last sentence????

[jainen]

The tie breaker rules

>>the tie breaker should take effect<<

The tie breaker rules (greater time or greater AGI) only apply when a child lives with BOTH parents for more than half the year, and both parents claim the child. If one parent does not take the exemption, the other one can do so with no further justification because the qualified child relationship is already established.

But what if the child doesn't live with either parent for more than half the year, or with only one? In that case, the old rules (now called qualified relative) apply. Form 8332 is for a parent who lives with the child less than half the year AND less time than the other parent.

Another thing that seems like it changed but really hasn't is the question of support. A parent can now claim a qualified child even if the child is supported by a third party such as welfare or a grandparent. However, the 8332 parent does not have a qualified child, and uses the old rules. Transferring the exemption is only permitted when one or both the parents provide more than half the support.

Burton is right that these rules haven't changed (or rather, they did change but then changed back!) No doubt he is also right about the IRS getting tougher on this question, which means that we tax preparers must also be more assertive in documenting the correct position.

[Snaggletooth]

Welcome Back

Burton - good to hear from you and welcome back to the board! I was hoping you would chime in with your usual expertise, and we will look forward to hearing more from you during the heat of tax season.

I've got one client who was NOT granted custody in his divorce, but Momma is out drinking and living quite a night life. The result of this is that the child is spending the night with Daddy about 250 nights of the 365, and after school is staying with his paternal grandmother. I'm telling them to document these 250 days on the calendar, and Daddy will claim the child.

I think the IRS definition of custody, as you have outlined, is the perfect answer to such foggy verbage as "joint custody" or "no custody" or "parenting plan" etc. And if NEITHER parent has the child living more than 50% of the time, then there is no award of the dependency and child credit by virtue of their custody definition.

By the way, you're probably a big Buckeye fan. Worst of luck!! I think they will win, though.

[New York Enrolled Agent]

The Reulations do give a definition of custody in §1.152-4(b)

b) Custody. “Custody,” for purposes of this section, will be determined by the terms of the most recent decree of divorce or separate maintenance, or subsequent custody decree, or, if none, a written separation agreement. In the event of so-called “split” custody, or if neither a decree or agreement establishes who has custody, or if the validity or continuing effect of such decree or agreement is uncertain by reason of proceedings pending on the last day of the calendar year, “custody” will be deemed to be with the parent who, as between both parents, has the physical custody of the child for the greater portion of the calendar year.

It seems to me in the absence of a new regulation, the IRS cannot change this definition. A previous post suggests otherwise, but I believe any taxpayer has good authority using this regulation. The Tax Court appears to "count the days" of physical custody only in joint or split custody cases.

[jainen]

the one to go with

>>in the absence of a new regulation, the IRS cannot change this definition<<

This is true about the IRS. However, CONGRESS CHANGED THE LAW. The regs haven't been updated to reflect the GO Zone Act but there is no possible way to carry your point. When the regs conflict with the tax code, the tax code is the one to go with.

[Koss]

But what if the child doesn't live with either parent for more than half the year, or with only one? In that case, the old rules (now called qualified relative) apply. Form 8332 is for a parent who lives with the child less than half the year AND less time than the other parent.

Another thing that seems like it changed but really hasn't is the question of support. A parent can now claim a qualified child even if the child is supported by a third party such as welfare or a grandparent. However, the 8332 parent does not have a qualified child, and uses the old rules. Transferring the exemption is only permitted when one or both the parents provide more than half the support.

I don't disagree with anything Jainen has said here. But I'm going to try to clarify it...

Only the custodial parent can use Form 8332 to release the exemption. As I noted above, the custodial parent is the one with whom child actually lived for more than half the year--not the parent identified as the custodial parent in the divorce decree.

Form 8332 can only be used if the child is the qualifying child of the custodial parent. In order for this to be the case, the child must have actually lived with this parent for more than half the year. If the child actually lived with the other parent for more than half the year, then that parent is the custodial parent.

If the child did not live with either parent for more than half the year, then neither parent is the custodial parent, and the child is not the qualifying child of either parent.

In this scenario, one parent may be able to claim the child as a qualifying relative.

The exemption for a qualifying relative cannot be released using Form 8332. It is only for a qualifying child.

It is not mathematically possible for any person to be the qualifying relative of more than one taxpayer. Why? Because for qualifying relative, you have to provide more than half of the person's support.

But don't forget: Qualifying relative won't get you EIC or the Child Tax Credit. Those credits also require that the child live with you for more than half the year.

If a child does not meet the criteria to be a qualifying child of anyone, it is very easy, at least in theory, to determine who, if anyone, can claim the child as a qualifying relative. It is the person who provided more than half the child's support.

Yes, there is still something called a multiple support agreement.

I have heard of this instrument actually being used twice. One guy I know who works at a regional accounting firm said that he met a banker, who once saw a movie in which one of the characters signed a multiple support agreement. And then last year I met a science teacher who said that his high school library had a book that described a multiple support agreement in great detail. The book was in the fantasy section.

Burton