As a parent you many assume that you can claim your children as dependents on your tax returns. But what if you and the other parent do not live together? In review of Anderson v. Commissioner, a recent case decided in tax court, we see that there are specific rules as to which parent is entitled to the dependency exemption. Rules that you may need to know before filing your taxes.

A Very Busy Man

We invite you to peer into the life of Albert Anderson and his busy work schedule. Albert was a married man. He and his wife Angela were married in December, 2004. During the following year, however, Albert and Angela did not live together. Albert was very busy as he worked two jobs, which may be one of the reasons why Angela did not move in with him. From 9:00 am to 5:00 pm Albert worked as a gas station attendant, and from 11:00 p.m. to 7:00 am he worked as a room service attendant at a casino.

As you can imagine, Albert had very little time to attend to personal matters, while moonlighting, and literally working night and day. With such a hectic schedule, Albert would go home for a few hours to sleep, and then he would wake up, eat, take a shower, and head back to work. Albert spent very few hours at home.

In May, 2004 Albert's personal life became even more complicated, when a woman named "Cynthia," gave birth to his son. After the baby's birth, Albert continued to live by himself. Cynthia and the baby lived about fifteen minutes away.

When Albert filed his 2004 federal tax return, Albert claimed head of household filing status, a dependency exemption for his son, and an earned income credit of $2,406. Obviously Albert believed he was entitled to the dependency exemption, since he was the child's father.

The Internal Revenue Service Comes Knocking

Unfortunately, the IRS had problems with Albert's tax return. The IRS sent Albert a deficiency notice taking the position that his correct filing status was single and that he was not entitled to either the dependency exemption or the earned income credit. According to the IRS, Albert's deficiency amounted to $2,406, the amount of the disallowed earned income credit. Albert subsequently petitioned the tax court for relief.

In tax court, Albert testified that although Cynthia and the baby did not live with him full-time, the two would come to his house every morning to be with him while he slept a little before going to work. According to Albert, Cynthia and the baby stayed at his house during the day while he worked at the gas station, and he would take them home when he went to his night job at the Casino.

Moreover, Albert argued that he was entitled to the exemption based on the amount of child support he was providing for the baby. As evidence of the support he provided for the baby, Albert submitted to the tax court receipts for things he bought the baby, such as food, clothing, diapers, and of course toys. However, Albert had not documented the total amount of money he claimed to have spent on the baby.

And the Tax Court Speaks . . . .

The tax court denied Albert's relief and held that he was not entitled to the dependency exemption. In rendering it's decision, the tax court reasoned that Albert would be allowed to claim the dependency exemption for his son only if he could show that he had furnished over half of the child's support for 2004 and had custody of him for more than half of the year.

In review of the evidence, the court further stated that Albert's testimony regarding his daily routine "strains credibility," but even if it were true it would not entitle him to claim the exemption because he failed to show that he provided over half of the child's support or had custody for more than half of the year. Furthermore, based on Albert's testimony, the court found that Cynthia had custody of the baby, and Albert failed to document the support he had paid.

As to Albert's request for the earned income credit, the court noted that a married person cannot claim the credit unless he or she files a joint return, which Albert had not done. Moreover, Albert would not be entitled to claim the credit if he was not entitled to claim the dependency exemption. Thus, all of Albert's requests were denied and the court held that he owed the government money.

Some Armchair Quarterbacking

It is always easier playing arm chair quarterback, but it seems to be a no brainer that Albert should have obtained the advice of an attorney or tax expert before filing his taxes. According to the Internal Revenue Code, the custodial parent (defined as the parent with custody for more than half the year) is entitled to claim the dependency exemption.

However, there are a couple of ways to get around this rule. First, the non custodial parent may claim the dependency exemption if (1) the custodial parent signs a declaration that releases the claim to the exemption, and (2) the noncustodial parent attaches the signed declaration to the tax return for the year in question. Without this release, the noncustodial parent may not claim the exemption, despite the terms of a Judgment of Dissolution, or child custody or support order, and despite any written or verbal agreements between the parents.

It is important to note that the custodial parent does not have to use Form 8332 as long as the declaration conforms to its substance. However, the declaration requires certain information as specified by the Internal Revenue Code, which Form 8332 includes, so it is probably not a bad idea to use the form.

If the noncustodial parent is granted the dependency exemption for multiple years, the custodial parent may either sign a declaration each year or sign one release, with copies to be attached each year by the noncustodial parent. It is very important to know that the failure to attach the declaration to the tax return can be fatal, as the IRS takes no prisoners when it comes to this rule.

Another exception is when the family court orders the custodial parent to release the dependency exemption to the non custodial parent, which can happen in California and many other states. California has followed the majority view that state trial courts have jurisdiction to allocate federal dependency exemptions between parents when child support is at issue. Thus, in California, family courts often order allocation of the dependency exemption to the non custodial parent and order the other parent to sign the declaration, when it makes financial sense to do so. And it makes sense when reallocation of the exemption results in more child support to the custodial parent and more cash in the pocket of the parent ordered to pay child support.

In light of the intricate tax laws and where child or spousal support is involved, it does not make sense to proceed with filing your tax returns without the advice of an attorney or tax expert. In the instant case, we can see that Albert clearly was not entitled to the dependency exemption, but he may have been able to cure his problem by obtaining Cynthia's waiver (it never hurts to be nice to the other parent), or by going to family court to obtain an order.

Some Practical Advice

In summary, if you are a non custodial parent, paying child support, and you want to claim the dependency exemption on your tax return, consider the following:

1) Ask the other parent if he or she will agree to the release, and if so, be sure to have the declaration signed. Again, I would suggest you use Form 8332, so that you do not forget to include all of the information required by the Internal Revenue Code;

2) Be sure to attach the declaration to each year's return where you are claiming the dependency exemption; and

3) If you cannot secure the custodial parent's cooperation, find out if it makes financial sense for you and the custodial parent to reallocate the exemption, and if so consider filing a request with the court that the exemption is reallocated to you. Obviously, there is no guarantee the court will agree with you, and you should consider the fact that the prevailing party may request and receive attorney's fees. Thus, it would probably be a good idea for you to speak to a competent family law attorney to help you decide if going forward with the motion would be in your interest.