Taxing Questions

They say Death and Taxes are certainties.  The ability to catch every red light in Kokomo, Indiana probably narrowly missed the list. But for as long as there have been taxes, there have been reasons to argue about taxes.  One such struggle involves the use of tax exemptions for children of divorced or unmarried parents.

As tax time nears, many parents in blended families look to their divorce or custody agreements to determine who has the right to claim the kids for taxes.  These agreements are as varied as families themselves.  For example, if Carol and Mike get divorced, they may have an agreement that says Carol gets to claim the three girls (Marcia, Jan, and Cindy); and Mike gets to claim the 3 boys (Greg, Peter, and Bobby).  But if they do not agree, how will a court decide who gets to claim the children?

First, it’s important to understand that state courts in Indiana cannot change the tax code.  If the tax laws say that “a person who has a dependent more than 50% of the year can claim that person,” there’s nothing the court can do to change that.  But the tax code also permits this right to be transferred, and that’s where the courts come in.  Family courts can order a parent with physical custody to sign a transfer of this right to a noncustodial parent.

The Child Support Rules and Guidelines in Indiana are explicit that a child support calculation does not take into account the awarding of an income tax exemption.  In fact, an Indiana child support calculation actually calculates support for both parents, but it assumes that the (physical) custodial parent is already spending this money on the child.  This means that the “I should get to claim my child because I pay support” argument is not the law in Indiana, and probably not going to persuade the judge.

The Guidelines to the Support Rules direct courts to examine the exemption question on a case-by-case basis, which means there is no hard and fast rule.  It does provide six factors to examine, however:

(1) the value of the exemption at the marginal tax rate of each parent;

(2) the income of each parent;

(3) the age of the child(ren) and how long the exemption will be available;

(4) the percentage of the cost of supporting the child(ren) borne by each parent; and

(5) the financial burden assumed by each parent under the property settlement in the case.

(6) the financial burden assumed by each parent under the property settlement in the case.

(Child Support Rules and Guidelines, G. 9).

In my own experience, many judges have interpreted the first factor to mean that they will approve any order which seeks to prevent the waste of the tax exemption.  That is, if the custodial parent’s income is so low that none of it is taxable, the court will often order that exemption to be released to the noncustodial parent.  Other judges take a “hands off” approach and will almost never order a custodial parent to relinquish the right to claim a child unless the court is enforcing a prior agreement of the parties.  Local courts are given a great deal of discretion in making these determinations – so attorneys in the local bar are probably the best resource to help you determine when a request to modify the use of the exemption might be appropriate.

One final thought: the IRS has become more insistent in recent years that it must receive a copy of the IRS Form 8332 signed by the custodial parent with the noncustodial parent’s tax return, particularly in cases where the right is contingent.  (It’s common for a court to make the use of the exemption contingent upon being current on support.) The days of a noncustodial parent simply making sure that he files first, thereby beating the custodial parent to the punch and “shutting out” the social security number of the child for use by the custodial parent, are probably over.