A rundown of the changes in the dependency exemptions in divorce after the Internal Revenue Service amended Section 152(e) in 2008.
-MML Investors Services — New York
In 2008, the IRS amended Section 152(e), which deals with dependency exemptions. The changes to the tax code can be summarized as follows:
1. A divorce agreement or court order can no longer be used as a substitute for Form 8332.
2. The custodial parent, for 2009 and forward, is the one with whom the child resides the greater number of nights during the year, regardless of the terms of the divorce decree.
3. The custodial parent can unilaterally revoke the release of a child exemption for calendar years 2009 and forward, even if the release was made prior to 2009.
Given these changes, all non-custodial parents who plan to take a dependency exemption should obtain Form 8332 for 2009 and all future tax years.
For any future settlement agreements that will include a provision for a non-custodial parent to take a dependency deduction for one or more children in one or more future tax years, have the custodial parent complete Form 8332 coincident with executing a settlement agreement.
Do not forget that the individual claiming a dependency exemption is entitled to benefit from a Child Tax Credit and any allowable Hope and/or Lifetime Learning Educational Tax Credits. As part of any discussion surrounding the dependency exemption, you should consider the various “Phase Out Amounts” – i.e. at what level of income benefits diminish. For 2009, the Child Tax Credit phases out from $75,000 to $95,000 (of Adjusted Gross Income) and Hope and/or Lifetime Learning Educational Tax Credits phase out from $48,000 to $58,000 for single and head of household filers. The credits are generally more valuable to low and middle-income filers than the dependency exemption itself.
Finally, remember that the custodial parent is the only parent eligible for additional tax benefits, such as filing as Head of Household, the Earned Income Credit, and the Child and Dependent Care Credit.
As a result of the varying phase-outs, credits, deductions and overall complexity in this area of the tax code, please be sure you understand how the terms of a settlement will impact income taxes before signing a settlement agreement.
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Noah B. Rosenfarb, CPA is Managing Director at Freedom Divorce Advisors where he provides sophisticated tax and financial advice to affluent divorced women. Mr. Rosenfarb integrates life planning with financial planning to ensure clients experience the maximum benefits of affluence post-divorce. His holistic approach increases the probability of leading a life that is filled with prosperity – the kind that is measured more by personal happiness than merely by currency.
Family lawyers and mediators previously accustomed to allocating the child dependency exemption to the lower-income spouse, have begun to rethink.