Who Can Claim the Children as Dependents for Tax Purposes?

This issue is either overlooked by the separated or recently divorced parties, or it is hotly disputed; in either case, it is almost always misunderstood. One parent typically believes that since he or she is spending more time physically caring for the children, he or she should have the privilege of claiming the children as dependents each year at tax time. The other parent, if this parent has less time with the children, but is paying more child support, believes that he or she is more financially invested in the children and should therefore be allowed to claim the children. Although the parents can agree otherwise, and many times should and do agree otherwise for a variety of factors, here is what the IRS says: 

IRS Publication 501 and 26 U.S. Code § 152

Children of divorced or separated parents (or parents who live apart): In most cases, because of the residency test (where are the children actually living), a child of divorced or separated parents is the qualifying child of the “custodial parent.” A qualifying child is a dependent that can be “claimed” on a particular parent’s tax forms. Now, what is a custodial parent? The IRS definition:

Custodial parent and noncustodial parent: The custodial parent is the parent with whom the child has lived for the greater number of nights during the year. The other parent is the noncustodial parent.

If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater number of nights during the rest of the year. This can have interesting implications if the parties separate on December 28th, for example.

A child is treated as living with a parent for a night if the child sleeps:

  • At that parent’s home, whether or not the parent is present, or
  • In the company of the parent, when the child does not sleep at a parent’s home (for example, the parent and child are on vacation together).

What if there is an equal number of nights?   If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income (AGI).

Exception: The child will be treated as the qualifying child of the noncustodial parent if all four of the following statements are true.

  1. The parents:
  • Are divorced or legally separated under a decree of divorce or separate maintenance,
  • Are separated under a written separation agreement, or
  • Lived apart at all times during the last 6 months of the year, whether or not they are or were married.
  1. The child received over half of his or her support for the year from the parents.
  1. The child is in the custody of one or both parents for more than half of the year.
  1. Either of the following statements is true:
  • The custodial parent signs a written declaration, discussed later, that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return. (If the decree or agreement went into effect after 1984 and before 2009. If the decree or agreement went into effect after 2008, see Post-2008 divorce decree or separation agreement . Both of these forms can be found on the IRS website or from your CPA.)
  • A pre-1985 decree of divorce or written separation agreement must states that the noncustodial parent can claim the child as a dependent, the decree or agreement was not changed after 1984 to say the noncustodial parent cannot claim the child as a dependent, and the noncustodial parent provides at least $600 for the child’s support during the year.

Separating or divorced parents often agree to deviate from the wisdom of the IRA as stated above. There are times in which is makes more sense for the noncustodial parent to maintain the deduction(s). For example, perhaps his or her income also supports a sizable spousal support award, which although taxable to the recipient, compensates the recipient adequately for this arrangement.

There are also situations in which the custodial parent was granted the marital home to keep the children stable at some sacrifice on the part of the other parent. In some families, the parties have a larger number of children and dividing the number of deductions actually increases both parents’ incomes, which certainly benefits the children. There may also be other considerations contained in the parties’ equitable distribution agreement. This benefit is often used in negotiations to assist the equitable distribution of the parties’ assets in the divorce.

The list above is not comprehensive; there are many, many, reasons why this benefit may be shared or delegated differently than the IRS has conceived. In cases in which there is no agreement however, the IRS trumps . . . as usual.