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Stake claim to dependents in divorce

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in Small Business Tax

When a couple with minor children divorce or separate, one key consideration is the custody of the kids. But this raises an interesting question: Who gets custody of the kids’ dependent exemption deductions?

Strategy: Learn the main tax rules in this area. Absent a legally binding determination in the divorce or separation decree, IRS regulations kick in.

Each dependent exemption in 2015 is $4,000. In addition, other tax benefits, such as the child tax credit, the child care credit, and higher education tax breaks, could be affected.

Here’s the whole story: A custodial parent can claim a dependent exemption for a “qualifying child” who had the same principal place of abode for more than half of the year. Under the applicable regulations, the “custodial parent” is defined as the parent with whom the child resides for the greatest number of nights during the year. If a child is temporarily absent from a parent’s home (e.g., at sleep-away camp), the IRS treats the child as having spent the night with the parent with whom the child normally stays that night.

Where parents have joint custody and it’s a close call, keep a log of exactly where the child lives during the year. This can make or break the exemption for one of the parents.

Key point: If a child resides with both parents for an equal amount of time during the year, the IRS treats the parent with the higher adjusted gross income (AGI) for that year as the custodial parent. This could be a valuable tie-breaker in certain situations.

Generally, a noncustodial parent can claim a dependent exemption for a qualifying child only if the custodial parent releases his or her claim to the exemption. The release can apply to one year, multiple years or all future years. Use Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, and attach it to your tax return.

Tip: A custodial parent can revoke a waiver for future years by providing written notice to the noncustodial parent.

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