One of the common misconceptions that divorced parents have is that whatever the divorce agreement says will be honored by the IRS. This is no longer true. Starting in 1996, the IRS came up with the custodial parent rules and Form 8332 (or its equivalent) to determine who can legally claim a dependent.
In brief, the custodial parent is the one where the dependents live more than six months out of the year. The custodial parent has all rights to claim all credits (child tax credit, additional child tax credit, earned income credit, education credits, child care credits, etc). In fact, the only credit that the custodial parent can give to the non-custodial parent is the child tax credit. Let me use an example of how this currently plays out:
Let’s say that Jane is the custodial parent of two minor children, Cheryl and Thomas. Her divorce from ex-husband Joseph was finalized in 2022. Her decree says that Joseph (the noncustodial parent) has “the exclusive right to claim all unemancipated children of the parties.” Jane has not yet signed Form 8332. She would like to file as head of household and claim the child tax credit for at least one of the children. Is Jane required to sign Form 8332 and let Joseph claim both children because the divorce decree says so? What tax benefits would he claim if she does so?
No, Jane is not required by federal law to sign Form 8332. If she does sign Form 8332, the noncustodial parent may claim the child tax credit for that child.
The special rule for divorced and separated parents
Among other requirements of the special rule (IRC §152(e)(2)) to allow a noncustodial parent to claim a child’s exemption, the custodial parent must agree not to claim the child. To do so, she must sign a written declaration in “such manner and form” that is acceptable to the IRS and provide it to the noncustodial parent.
Federal income tax regulations (Reg. §1.152-4(e)(1)(ii)) allow only Form 8332 or a form that “conform[s] to the substance” of Form 8332 for this purpose. The regulation specifically states that a “court order or decree or a separation agreement may not serve as a written declaration.”
This federal law does not compel Jane to sign Form 8332 to release Cheryl’s or Thomas’s exemptions to Joseph, but without the release Joseph cannot claim them. She may benefit by consulting with her attorney for confirmation as to how to proceed.
What happens if you release a child’s exemption
Form 8332 serves to release a child’s exemption to the noncustodial parent. The exemption amount is currently $0 but the exemption release also allows the noncustodial parent to claim the child tax credit. Otherwise, only the custodial parent (or another person in the home for whom the child is a qualifying child) may file as head of household, claim the EIC, or claim the child and dependent care credit, as applicable.
Therefore a Form 8332 release would allow Joseph to claim the child tax credit for Cheryl or Thomas or both, depending on what Jane does. Even if Jane does release both exemptions she could still file as head of household. With or without a release, Joseph could not file as head of household or claim the other child-related benefits mentioned as he is not the custodial parent.