Wednesday, March 26, 2014

Divorce and Custody Disputes Illinois - Who can claim the children on their tax returns?

Which Parent gets to claim the Children on their taxes?

Once again tax season is upon us and a common question that comes up with divorced parties is, “Who gets to claim the kids on their taxes?”  The general answer to that question is the child dependency exemption goes to the custodial parent. Under Section 152 of the Internal Revenue Code, the custodial parent is defined as the parent having custody of the child for the greater portion of the calendar year. Put another way, the custodial parent is the parent the child lived with the greater number of nights during the year. This is what is commonly known as the Custodial Parent Rule.

There are two exceptions to the Custodial Parent Rule where a noncustodial Parent would be entitled to claim the children: (1) if a multiple support agreement is in effect or (2) if the custodial parent relinquishes the dependency exemption. When relinquishing the exemption, be sure to use IRS Form 8332, which must be completed by the custodial parent and attached to the noncustodial parent’s tax return each year the exemption is claimed. Here is a link to the IRS website for the form needed:

When going through a divorce, addressing which party is entitled to claim the dependency exemption on their taxes is an important component to add in a Marital Settlement Agreement.  Something as simple as the following provision could establish who is entitled to claim the children on their tax return:

“Beginning year 20__ and each year thereafter Husband provides child support to Wife in accordance with the provisions in this Agreement, Wife shall not claim the dependency exemption for any of the minor children of the parties for federal and state income tax purposes. Husband and Wife have agreed that Husband shall be entitled to the child dependency exemptions on his tax returns and both parties agree to execute IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, and any other form that may be required by the Internal Revenue Service to carry out the foregoing provision.”

Without such a provision, noncustodial parents run the risk of the child dependency exemption going to the custodial parent because Section 152 of the Internal Revenue Code establishes an automatic presumption that the custodial parent is entitled to the child dependency exemption.

Can the Court enter an Order allowing one Parent or the Other to claim the exemptions?

There is no issue under Illinois law that the trial court has the power to order the custodial parent to sign a waiver that he or she will not claim the child as a dependency exemption. The trial court also has the power to allocate the dependency exemptions in post decree matters. See IRMO Van Ooteghem, 187 Ill.App.3d 696 (3d Dist. 1989). In McCloud, 197 Ill.App.3d 95 (3d Dist. 1989), the Third District held it was error to award the exemptions to the parent providing support absent circumstances warranting the transfer to him. The Fifth District in IRMO Rogliano, 198 Ill.App.3d 404 (5th Dist. 1990), held that the trial court should allocate the exemption based upon which parent will contribute the majority of the support for the child. See also IRMO Clabault, 249 Ill.App.3d 641 (2d Dist. 1993).

Later case law has begun to fine tune this issue in cases where it is a close call as to which parent is contributing the majority of the support for the children. IRMO Moore, 307 Ill.App.3d 1041 (5th Dist. 1999), involved post-divorce proceedings in which the ex-husband claimed the children's expenses were $1,520 per month and his child support amounted to 51.9% of those expenses. He argued the party paying the majority of the children's expenses is entitled to the dependency exemptions, citing three cases: Clabault, Fowler (197 Ill.App.3d 95 (3d Dist. 1990)) and Rogliano. The ex-wife agreed with the ex-husband's reading of the cases he cited, but argued that he did not provide a majority of the children's support because the children's expenses were more than $1,520 per month.

The Moore court held the allocation of dependency tax exemptions is an element of a support award. As such it is a topic over which a trial court has “considerable discretion.” Moore commented that although Rogliano held that in allocating exemptions the court should consider which parent will provide the majority of the child's support, and although Clabault affirmed an award of all exemptions to the parent providing more than 51% of the children's support, these holdings did not require an award of all tax exemptions to the parent paying the majority of the children's support. The Moore court stated that because the children's expenses were found to be more than $5,120 per month, the ex-husband was not paying more than 51% of the children's support, rendering the Rogliano and Clabault holdings inapplicable. The appellate court found no abuse of discretion in dividing the tax exemptions between the two parents who each paid approximately half of the expenses for the children.

Any judgment of dissolution of marriage should specify that the parties shall execute such I.R.S. forms as are required to effect the allocation of the dependency exemptions. While Illinois case law seems to hold that the trial court should allocate the dependency exemption based upon which parent will contribute the majority of child support, this would make no sense in cases where the child support payor is in the highest income tax brackets because of the phase-out of the exemption at the high income end. The court should take a practical approach in these cases and allocate the exemptions to each party based upon who would take the greater economic benefit from them.

A case which was similar to the Moore holding is Stockton v. Oldenburg, 305 Ill.App.3d 897 (4th Dist. 1999). The trial court apparently found the parties equally contributed to the rearing of the child, and awarded each party the tax exemption in alternate years. The appellate court stated that this was neither an abuse of discretion nor against the manifest weight of the evidence.

In Conclusion, the parents can easily reach agreements regarding who claims the children each year and that can be incorporated into a Custody Judgment/Parenting Agreement. In addition, if the parents do not agree, either party can petition the court to enter an order resolving the issue.

If you have any questions concerning whether you are entitled to the child dependency exemption for tax purposes, or if you need an attorney to fight for your right to claim exemptions/credits, feel free to call our Des Plaines law office at (847) 813-6011.