Are Your Children A Bargaining Tool for Tax Custody Issues?

Single parenting has become more prevalent in today’s society and with it comes more challenges in preparing taxes.

When a couple divorces, in most cases the divorce decree will contain very clear instructions as to how the finances will be handled including, but not limited to, who will claim the children on their taxes. When a couple has never been married, the lines are not as clear and sometimes it becomes a race between who files their taxes first. The following contains information that will help you in this situation prepare for the tax filing season.

When I was divorced in 1979, the divorce decree clearly stated that I retained fully and sole custody of my daughter. At that time, there was no stipulation on who would or would not claim our daughter. The second year of my divorce, my ex-husband jumped the gun and filed claiming my daughter and so did I. The IRS disallowed my dependency exemption and I had to fight tooth and nail to win my case with the IRS, which I did.

Over the last thirty years, the tax laws on dependency have changed drastically.
My scenario is not the case for members of my family, who I will call John and Jane for this writing. John and Jane were never married and they have two children. According to the official language of their custody agreement, Jane has primary physical custody of the children; however, according to the actual arrangement of time, they are basically equal. On a 14-night rotation, Jane has the children eight nights and John has the children six nights; however, John works from home and has been keeping the girls after school during times when Jane was supposed to be responsible for their care. Jane, feeling that being the primary physical custodian givers her permission to do whatever she wants, has been claiming both children even though John pays child support every month on time. There is no written agreement. John and Jane cannot talk rationally about this situation and agree on what should be fair to both parties. Jane basically claims the children without ever giving her actions a second thought.

John came to me and we examined the law and contacted the IRS for further clarification and input. According to Publication 17, pages 27-33 under “Personal Exemptions and Dependents” there are two main tests that must be considered, the relationship test and the residency test. John enrolled in his school district and has been for the past three years.

According to Publication 17, after one determines that a child can be claimed because of their relationship to the taxpayer and it is determined that the residency test has been passed, the next step is to determine the amount of time spent in each home. The IRS states that any time there is a child who spends equal amounts of time in both homes, the taxpayer with the highest adjustable gross income is the person who is legally eligible to claim the child. Additionally, upon speaking with a representative from the IRS, I found upon speaking with a representative from the IRS, I found out that they will actually compare the exact amount of hours – they will go down to the very minutes if necessary-to determine if there has been any false reporting or a misunderstanding of the current law in place. Jane was wrong to file her tax return without asking for permission from John. The best case scenario would be that each person would claim a child; however, that is not what happened in this instance and in probably 80% of these situations.

The outcome is that John will file and claim one of the children and he will allow the IRS to sort out whatever issues need to be sorted. There is one thing to be careful of when child support is concerned. Depending upon what state a person lives in, the amount of the tax refund may directly affect the amount of child support that will be paid.

Here are some tips that should be followed in order to educate and protect yourself and your ability to claim a child on your tax return:

1. Have a written agreement commitment as to how the income taxes will be handled. Having a written agreement makes it clear as to how things will be handled should the two parties not be able to agree on this issue at a later date.

2. Make an appointment with the office who handles your child support case. This should be a free service. The officer of the court will take all of your information and the other parent’s and let you know how much each party is responsible for and whether the tax refund has any bearing on the child support amount. Some states have a child support calculator on their state’s website that allows the taxpayer to figure out their support amount without going in to the state office.

Once the evaluation is completed, I would recommend a letter be sent to the other party by certified mail informing him or her of the intentions to file and claim the child(ren).
Once those steps have been taken, I believe you will be clear to move forward in claiming the children for tax purposes.

Should the other party choose to claim the children anyway, the IRS will step in and will want to see all available documentation concerning actual hours the children were with each parent. John if very fortunate in that he has kept very detailed records concerning the time he has spent with his children, including all extra time. Should the IRS come knocking on his door, we have him prepared.

These situations are never pleasant for anyone and the more prepared everyone is on the front end, the less hassle there will be on the back end. We cannot control the actions of anyone, yet you can make sure that you are aware of the law and your rights concerning this type of filing.