In a custody case, one of the issues involved in many negotiations is who will get to claim the children as dependents on their income tax returns. This is called the dependency exemption. Children can be quite valuable when it comes to filing taxes and how much a person will owe or receive back as a refund. Many clients, especially lower income clients who receive the Earned Income Tax Credit can receive thousands of dollars back which is more than several months of income from their job.
South Carolina Family Courts have the authority to determine which parent gets to claim the children on the income tax return (SC Code Ann. §20-3-130(F)); however, the Court will not be able to allocate or distribute this exemption unless it is specifically asked for or allowed to be tried as an issue without objection from both parties.
Typically, the custodial parent will be awarded the dependency exemption; however, if the non-custodial parent is allowed to claim the dependency exemption for one or all of the children, the custodial parent will be required to complete and execute IRS Form 8332 each year and that form must be included with the non-custodial parent’s tax return when he/she files it.
But what if you don’t have a court order – before anyone has filed for custody? The IRS has a five part test for determining which parent may claim the dependency exemption:
- Joint Return.
The Relationship test means that the dependent you are claiming is your son or daughter (natural or adopted), a foster child, brother, sister, half-brother, half-sister, or a descendent of any of them.
The Age test simply means that your child is under age 19 at the end of the year and younger than you (or your spouse) or they are a student under the age of 24 at the end of the year and younger than you or your spouse. Finally, regardless of age, you may claim a child if they are permanently and totally disabled.
To meet the requirements of the Residency test, your child must have lived with you for more than half the year. There are some exceptions for temporary absences such as illness, education, military service, or vacation.
The Support Test requires that you provided at least one-half of your child’s support for the year and the child did not provide more than one-half of his/her support for the year. Most of the time this is not an issue; however, if your child works and earns enough income to support himself/herself, then you may lose this credit.
The Joint Return test means that the child cannot file a joint return for the year.
Absent a Family Court Order outlining who can claim the children, it is entirely possible that both parents would qualify to claim the child as a qualifying dependent using the dependency exemption. So who would get to claim the child in that case?
- If the parents do not file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year.
- If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year.
- If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person’s AGI is higher than the highest AGI of any of the child’s parents who can claim the child. If the child’s parents file a joint return with each other, this rule can be applied by dividing the parents’ combined AGI equally between the parents.