Page 75 - Family Law Services

former spouse incident to divorce), any disallowed losses or deductions due to basis or at-risk limitations
are carried over to the spouse or former spouse.

Dependency Exemptions

The ability to take a dependency exemption for children of divorced or divorcing parent can have signif-
icant tax consequences for the taxpayer. However, under TCJA, there are no longer personal exemption
deductions for the taxpayer or dependents for tax years beginning 2018 and continuing through 2025.
This means exemptions are eliminated as a deduction from gross income and worth $0.

Working Families Tax Relief Act of 2004 set a uniform definition of a qualifying child, beginning for
tax year 2005. To be eligible to take a dependency exemption for a qualifying child, a taxpayer must sat-
isfy the following dependency tests required by the IRS:

• Relationship test. The child must be the taxpayer’s son, daughter, stepchild, or a descendant of
one of these. Adopted children and foster children also qualify.

• Age test. The child must be under the age of 19 as of December 31 or under the age of 24 if he or
she is a full-time student for at least 5 months of the year. The child will qualify even if he or she
is 19 or older and not a student, as long as his or her own annual gross income is less than the
current exemption amount. If the child is permanently disabled, the age test does not apply.

• Residency test. The child must have lived in the home for more than half the year.

• Support test. The child cannot have provided more than half of his or her own support for the
year.

An exception is made for the children of divorced or separated parents under IRC Section 152(e)(1). A
custodial parent of a child who has lived with that parent for the greater portion of the tax year is eligible
for the dependency exemption deduction, provided the following requirements are met:

• One or both parents together must provide over half of the child’s support during the year.

• A noncustodial parent may take the dependency exemption for his or her child if the custodial
parent signs an IRS Form 8332 or similar statement releasing the exemption. This form must be
filed with the noncustodial parent’s tax return for any year in which the deduction is taken. The
custodial parent may elect to sign IRS Form 8332 on a yearly basis, for a specified number of
years, or for all future years, depending on the tax implications. If the divorce decree or separa-
tion agreement went into effect after 1984 and before 2009, attaching the divorce decree or sepa-
ration agreement, which states that the noncustodial parent qualifies for the exemption, is suffi-
cient for that parent to claim the exemption.

Typically, a divorcing couple should allow the higher-income bracket spouse to claim the dependency
exemptions. An exception to that would be when the noncustodial parent’s income reaches or surpasses
the phase-out threshold to the exemption or the child credit, or both. Along with the dependency exemp-
tion come additional child-related tax credits that may have an effect on the taxpayer’s tax liability.

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