Two tax issues frequently need to be addressed in divorce: One, if there are qualifying children, which parent gets to claim the children as dependents? Two, which parent may be entitled to claim Head of Household filing status. The following is a general discussion of the rules.
The IRS rules provide that the “custodial parent” is the parent entitled to claim a child as a dependent. The custodial parent is generally the parent with whom the child lived for the greater number of nights during the year. The noncustodial parent is the other parent. If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income.
Oftentimes, a Marital Settlement Agreement (MSA) will specify which parent can claim a child as a dependent for specified years. For example, the MSA may state that Spouse 1 can claim Child 1 as a dependent in odd years. It is important to know that the IRS says an MSA is not controlling. If Child 1 spends more nights with Spouse 2 during the year, Spouse 2 is the Custodial Parent entitled to the dependency exemption. Spouse 2 can release her/his claim to the dependency exemption by executing Form 8332 – Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent for the current tax year (Part I) or future years (Part II) and providing noncustodial parent Spouse 1 with a copy of the form. Spouse 1 must attach the Form 8332 to her/his tax return if she/he claims Child 1 as a dependent.
If the noncustodial parent has received Form 8332 from the custodial parent releasing claim to dependency exemption for a child for the tax year, the noncustodial parent can claim the child as a qualifying child for the child tax credits (refundable, nonrefundable and additional). However, the noncustodial parent cannot claim the credit for child and dependent care expenses, the exclusion for dependent care benefits, the earned income credit, or the health coverage tax credit.
Head of Household Filing Status
You may be able to file as “Head of Household (HOH)” if you meet the following requirements:
- You are unmarried or considered unmarried on the last day of the year.
- You paid more than half the cost of keeping up a home for the year.
- A qualifying child (son, daughter, or grandchild) lived with you in the home for more than half the year (183+ days) except for temporary absences, such as school.
If you are a noncustodial parent, the term “qualifying child” for HOH filing status does not include a child who is your qualifying child only because the custodial parent has released her/his claim to the dependency exemption by executing Form 8332. Only the custodial parent is entitled to claim HOH filing status.
If you claim HOH filing status for a tax year, you must attach California FTB Form 3532 – Head of Household Filing Status Schedule to your California tax return.
If your divorce is not final by December 31, you may be considered unmarried for HOH filing status if you meet all of the following tests:
- You file a separate return.
- You paid more than half the cost of keeping up your home for the tax year.
- Your spouse didn’t live in your home during the last six months of the tax year.
- Your home was the main home of your child, stepchild or foster child for more than half the year (183+ days).
- You must be able to claim the child as a dependent. Note you meet this test if you can’t claim the child as a dependent only because you have executed Form 8332 and the noncustodial parent can claim the child as a dependent for the tax year.
See IRS Publication 501 – Dependents, Standard Deduction and Filing Information for a more detailed explanation of the tax rules.