Divorced parents

[S T]

Father is claiming dependency for Jared, who is age 4 and Father has joint custody 50/50 father has higher AGI . Child care for Jared.

Mother is claiming dependency for Jesse, who is age 13 and has joint custody 50/50 Mother has lower AGI. No child care for Jesse

No problem so far. I am looking at TB 3-16 and also neither parent has remarried, and each parent is providing over 1/2 of child's support and cost of their own home.

Under the joint custody and divorce agreement, mother is to provide 50% of Jared's child care and the father who is claiming him as a dependent provides the other 50% of child care.

Child care for Jared goes to Father, correct, as Father's AGI is higher.

Question is does the father only claim the child care based on the amount he actually paid for child care or can he claim any additional amount for what the Mother had to pay for child care under the divorce agreement to max out child care deduction. Only makes a few dollars difference, but I don't know the answer.

Thanks,

Sandy

[Luis Mopeo]

Question is does the father only claim the child care based on the amount he actually paid for child care or can he claim any additional amount for what the Mother had to pay for child care under the divorce agreement to max out child care deduction. Only makes a few dollars difference, but I don't know the answer.

The amount must be paid so the taxpayer can work. The mother is not paying so she can work, she's paying because she's ordered to pay child support. Not an eligible expense for the father.

If the custody is 50/50, nobody gets the dependency exemption, the child tax credit, or the dependent care credit.

I have the same type of clients. The typical conversation is "We have 50/50 custody. Can I claim this or that?"

"If custody is 50/50 nobody can claim the kids at all."

Angry blank stare.

"Who has real custody of the kids for more than half the year?"

"The court papers say it's joint custody."

"Where do the kids really live more than half the year?"

"The court papers say 50/50."

"Then nobody gets anything."

I do the dance with the client to force the client to tell the truth about who has physical custody for more than half the year. If you don't establish that, you end up taking a position not based on the rules, but based on trying to manipulate a better outcome on a tax return. In all my years, I remember one client where the kids really were going back and forth so much it was difficult to determine who they lived with more than half the year. All the rest knew where the kids lived, they just pretended they didn't. A 50/50 split on divorce papers is often looked at like a tax-planning tool. It's not, at least according to the rules.

There are two kinds of custody we're talking about here. Legal custody is what the court papers say. Physical custody is where the kid actually lives for more than half the year. The rules are based on physical custody, not legal custody.

[New York Enrolled Agent]

Agree with LM - you have a more fundamental concern - you need to first establish who is the custodial parent before you do anything else.

§152(e)(4) Custodial parent and noncustodial parent.
For purposes of this subsection —

(A) Custodial parent. The term “custodial parent” means the parent having custody for the greater portion of the calendar year.

(B) Noncustodial parent. The term “noncustodial parent” means the parent who is not the custodial parent.

Custody means physical custody. The divorce decree does not determine the custody issue. The higher AGI is irrelevant. Tie breaker rules involving AGI are only used when two taxpayers actually claim the same qualifying child. One parent may need to release the child via a Form 8332.

Notice 2006-86 might be of some help after you determine who is the custodial parent for each child. As an aside, the IRS has proposed new regulations that would change the definition now used in §152(e)(4).

[bertrans]

divorced parents

The amount must be paid so the taxpayer can work. The mother is not paying so she can work, she's paying because she's ordered to pay child support. Not an eligible expense for the father.

If the custody is 50/50, nobody gets the dependency exemption, the child tax credit, or the dependent care credit.

I have the same type of clients. The typical conversation is "We have 50/50 custody. Can I claim this or that?"

"If custody is 50/50 nobody can claim the kids at all."

Angry blank stare.

"Who has real custody of the kids for more than half the year?"

"The court papers say it's joint custody."

"Where do the kids really live more than half the year?"

"The court papers say 50/50."

"Then nobody gets anything."

I do the dance with the client to force the client to tell the truth about who has physical custody for more than half the year. If you don't establish that, you end up taking a position not based on the rules, but based on trying to manipulate a better outcome on a tax return. In all my years, I remember one client where the kids really were going back and forth so much it was difficult to determine who they lived with more than half the year. All the rest knew where the kids lived, they just pretended they didn't. A 50/50 split on divorce papers is often looked at like a tax-planning tool. It's not, at least according to the rules.

There are two kinds of custody we're talking about here. Legal custody is what the court papers say. Physical custody is where the kid actually lives for more than half the year. The rules are based on physical custody, not legal custody.

Mr Lopeo, I agree with your presentation completely. You have put your finger on the central distinction: legal custody and physical custody for tax purposes. I see and hear the same thing often: many divorced parents appear to think that 50/50 gives each of them a free pass.

[Bees Knees]

Mr Lopeo, I agree with your presentation completely. You have put your finger on the central distinction: legal custody and physical custody for tax purposes. I see and hear the same thing often: many divorced parents appear to think that 50/50 gives each of them a free pass.

The two court cases cited in this thread and in TTB page 3-17 are as follows:

In McCullar, Tax Court Memo, September 17, 2003, dad had a log detailing
physical custody over 50% of the year and was treated as the custodial
parent under Section 1.152-4(b) even though the divorce decree awarded
mom primary custody and control of their daughter. In contrast, in Mullen, T.C.
Summary Opinion 2006-91, the court said the mother was the custodial parent
because the separation agreement stated “the children shall reside primarily”
with the mother. There was conflicting testimony as to who had the greater
physical custody. Without proof that the children resided with the father for
“a substantially longer portion” of the tax year, custody was determined by
what was stated in the separation agreement.

Of course other rules apply, but the two court cases illustrate that the court may be interested in a detailed log of who had physical custody. However, if there is conflicting testimony, the court may in fact look to the divorce decree (legal custody) to see who was supposed to have physical custody the longest. It all boils down to you need substantiation to do an end run around the divorce decree.

[JAinNC]

Thanks Guys

I think I'll print this thread, have it increased in font sign, and framed it in a huge frame on my office wall. Then when I get this question a few times a year, I can just point.

Jeannie

[S T]

Divorced Shared Custody

Thanks Luis, NYEA and Bees for the above posts.

Taxpayer and Divorced Spouse both employed. Shared Legal Custody of 2 dependents, and shared physical custody of the dependents. Taxpayer and ex-spouse have each agreed to only claim one of each of the two dependents on their respective returns.

It is amazing that once you start to inquire and ask questions of a client what responses are received. The taxpayer I posted about, does have joint 50/50 Legal Custody, but their Legal advisor had warned them about the Joint Physical Custody rules for tax purposes. So shared physical custody and amazingly some logs of physical custodial time have been produced. Now to see whether or not that will work for the HOH, claiming a dependent and also the child care deduction on the one child that taxpayer is wanting to claim.

Notice 2006-86 takes effect, for years after 12/31/04

The rule of § 152(c)(4)(B) applies if both taxpayers claiming the child as a qualifying child are the child’s parents who do not file a joint return together. Under § 152(c)(4)(B), the child is treated as the qualifying child of the parent with whom the child resides for the longer period of time during the taxable year. If the child resides with both parents for the same amount of time during the taxable year, the child is treated as the qualifying child of the parent with the higher adjusted gross income for that taxable year.

Seems like this could help alleviate some of the issues we have to deal with as tax preparers. I am understanding then that we do not have to have form 8332 release, and even though the taxpayer should still keep physical custody logs for their own tax and legal issues, taxpayer with the higher AGI could qualify for the dependency and child care credit.

Here is the link for the full notice http://www.irs.gov/irb/2006-41_IRB/ar11.html

More comments and advice would be welcomed.

Thanks

Sandy

[Golden Rocket]

50-50 custody

I run into this claim of 50-50 custody every year - in fact several times. You get a very noncommital answer from clients when you try to pin them down. They want to put YOU on the hot spot as if this will pressure YOU into declaring the child their dependent.

I love the response the IRS has fashioned to this ridiculous claim. "Neither of you can claim the child." And it IS ridiculous because even though a court may stipulate 50-50 custody, there is no way a child can spend the exact amount of time with each parent. When they tell you this they're trying to box you into making the decision.

It's also amazing that when you tell them neither parent can claim the child, you start getting straight answers.

Mopeo's response has already been applauded, and I couldn't agree with him more.

[S T]

Notice 2006-86

GR, I agree with you and all of the above posts , however take a look at notice 2006-86 or the excerpt I posted and the last sentence. I posted the link to the notice, if you care you read all of it and some of the examples. Is IRS recognizing that this is an impossible situation??

What are your thoughts?

Sandy

[Golden Rocket]

Tie Breaker

Sandy, I believe there is a unique time in which a tie-breaker can apply.

Unless someone can concoct another situation, I believe it is possible for the child to live with both parents more than half the year. This would be possible in any year that the parents lived together for part of a year.

Example: wife kicks husband out of the house August 31, 2007. Children thus live with mother for all of 2007, and live with father for more-than-half of 2007. Thus each parent can claim over 50% living time, even though custody has not yet been awarded. A situation such as this could invoke the tie-breaker.

I have even heard of cases where two parents get a divorce, but continue to live together. I don't know how they stand it, but I guess it is theoretically possible. Maybe this situation would also invoke the tie-breaker.

The link you furnished states that no exemption is allowed for a child that does not live with the parent MORE than half the year.

[New York Enrolled Agent]

Sandy

In your original post you note that your parents are divorced. I think you need to look at §152(e).

I believe the excerpt you posted deals with a different fact pattern. I don't think the tie breaker rules with AGI in §152(c) are for divorced parents. It appears that §152(e)(1) says that "notwithstanding ... 152(c)(4) ..." etc. Others may think differently.