Tax Treatment in 50-50 Custody Case

The IRS is not bound by what the divorce decree says. Federal tax law does not recognize 50-50 custody. For any given year, one parent is the custodial parent and the other parent is the noncustodial parent. IRS Publication 501 says the following.

"The custodial parent is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent. . . . 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 AGI."

If the divorce agreement requires the noncustodial parent to claim the child as a dependent in some years, the custodial parent must sign a Form 8332 allowing the noncustodial parent to claim the child, and give the signed Form 8332 to the noncustodial parent. The noncustodial parent has to attach the signed Form 8332 to his or her tax return. The divorce decree should require the custodial parent to provide whatever documents are needed to allow the noncustodial parent to claim the child in the agreed-upon years.

In a year that the custodial parent claims the child as a dependent, that parent can claim all the tax benefits related to the child, and the noncustodial parent cannot claim any of those benefits.

In a year that the noncustodial parent claims the child as a dependent, federal tax law specifies how the tax benefits of having a child are divided up. The noncustodial parent can claim the child tax credit for the child, and any education credits. But the custodial parent can still claim the child care credit and use the child for the Earned Income Credit and to qualify for head of household filing status, provided that the other requirements for those tax benefits are met. Only the custodial parent can use the child for those benefits. The noncustodial parent cannot claim them.

I recommend that your son have a tax professional review the divorce decree before it is finalized or signed. Divorce lawyers (and judges) often don't know as much about tax law as they think they do, and can put things in the decree that conflict with federal tax law and cause problems for the divorced parents.

Bob Sandler

First, there's an assumption that every year is the same length. We all know that's not true, but this is a de minimus hack to simplify accounting.

Second, and more important, each parent does not get custody (for tax purposes) for half of each year. Each parent gets custody (for tax purposes) for an entire year, then no custody the entire year after that. So the tests for "more than half the year" will include the parent whose year it is.

The IRS gives deference to the terms of divorce decrees, as far as I'm aware. If the judge awards tax benefits to each parent in alternate years, I don't see the IRS having a problem with that.

Exactly. If the IRS had a problem with these arrangements, there would have been widespread publicity and divorce lawyers would have had to come up with some other scheme.

Sure looks that way to me. See page 13 and following of Publication

501, . Note: I am not a tax professional; I just read this group, IRS publications, and general news. Don't rely on what I say, but check it out yourself.

No, it's not that simple. If the person whose year it is is the custodial parent, then yes, that person gets all the child-related benefits and the other person, the noncustodial parent, gets none. But if the person whose year it is is the noncustodial parent, then the benefits are split between the two parents, as I described in my earlier reply. In that year, the noncustodial parent gets only some of the benefits. The custodial parent still gets some of the benefits, even though the custodial parent is not claiming the child as a dependent.

Publication 501, page 17, says the following.

"If a child is treated as the qualifying child of the noncustodial parent under the rules described earlier for children of divorced or separated parents (or parents who live apart), only the noncustodial parent can claim the child as a dependent and claim the child tax credit, additional child tax credit, or credit for other dependents for the child. However, only the custodial parent can claim the credit for child and dependent care expenses or the exclusion for dependent care benefits for the child. Also, generally, the noncustodial parent can't claim the child as a qualifying child for head of household filing status or the earned income credit. Instead, generally, the custodial parent, if eligible, or other eligible person can claim the child as a qualifying child for those two benefits."

Bob Sandler

I agree with Bob.

Ira Smilovitz, EA Leonia, NJ

"ira smilovitz" wrote in message news: snipped-for-privacy@googlegroups.com...

I think Ira and Bob are probably correct going by a strict reading of the IRS regs. But I also think Stan is right that the IRS isn't likely to step in when the parties to a divorce agree to this kind of 50-50, alternating years setup, which I think is pretty common in states like mine (Florida). I know some couples who have this 50-50 arrangement written into their court approved divorce agreements, and I think they like the predictability of it and not having to track the total number of hours/days they have the kid. Seems to me that having to actually track the amount of time each party has the kid is fraught with problems - such as, what happens if each party calculates differently, and each thinks they are the custodial parent for the year. Divorced parents often prefer to avoid communicating or even seeing one another, and the last thing many such couples are going to want to do is get together to compare calendars and records of who had the kid on what days. And suppose they can't agree? Does the IRS actually expect them to go back into mediation or get a third party auditor to figure out who gets to be custodial parent for the year? And the notion that after going through all this, one parent is going to gracefully fill out a form 8332 for the other is kind of ludicrous. Most divorce couples I know do everything they can to avoid talking to one another. I think the 50-50 alternating year scheme is probably acceptable to most divorced parents with true split custody, and I can't imagine any couple in that situation doing things differently.

So I agree with Stan that the IRS probably winks at all this and doesn't make a big deal if the couple go along with it. The real question for me is why doesn't IRS solve this by allowing for half-exemptions and half-credits for situations where there is true 50-50 custody? It's all just math, and it would seem the IRS could implement this with a few software changes. As it is, there are probably numerous couples in states like Florida where

50-50 custody is written in divorce decrees that are technically violating IRS rules, and surely the IRS must know that.

--

The IRS doesn't make the rules. Congress makes the rules. The IRS has to follow the laws that Congress passes. Changing the rules would require "an act of Congress."

Bob Sandler

Adding to Bob's response... And Congress doesn't have to act to accommodate state actions (the 50/50 divorce decree).

Ira Smilovitz, EA Leonia, NJ

And if they did, they'd likely have to come up with a whole new set of tax brackets for people who could claim half a person as a dependent.

Bob, you are of course right. It's Congress who would have to make this change. But I still think it would be a good move.

--

I agree with Irv that Congress doesn't have to act, but they probably should. More and more states are going to 50-50 custody, including a few large states like Florida and NJ. According to this site, it looks like around 20 states are now defaulting to this.

I think it's only a matter of time before this issue becomes visible enough for Congress to do something to modify the IRS regs. It's becoming clear to me from this thread and my own observations, that numerous divorced couples are embracing the simplicity of the alternating years concept and are unknowingly (and maybe, in some cases, knowingly) violating the specific letter of the IRS regs by ignoring the technical definition of custodial parent.

And yes, Congress might have to create new half-brackets to accommodate half-exemptions, but it's all just math and can be accommodated through software. I think they made much more radical changes when they eliminated explicit exemptions and folded them into the brackets. More importantly, the idea of half exemptions is just a suggestion. An easier approach (at least in the short-term), is to just allow for couples with a court-ordered alternating-years decree to do what they've been doing and essentially make it legal.

--