Unfortunately I often come across this when a parent files their tax return electronically and the return gets rejected by the IRS. The rejection code will indicate that another tax return was filed claiming the dependent. At this point if the parent with the rejected return is certain that they have the right to claim the child, they have to submit the tax return by mail.
Once the mailed in return is received and processed the IRS will flag the two tax returns and send both taxpayers letters questioning who should be the taxpayer to claim the child. Typically, if one taxpayer amends their return and removes the child from the tax return the IRS doesn’t have to go further. Well, other than collecting any taxes owed if the taxpayer received a refund or if they now owe taxes due to amended tax return.
However, if both taxpayers insist that they claim the child the IRS will determine who can rightly claim the child. If the parents do not live with each other then the decision is simple. The parent with whom the child spent the most nights with throughout the year is considered the custodial parent and the custodial parent has a greater right to claim the child.
There is an exception to the custodial parent having a greater right to claim the child. For older divorce or separate maintenance decrees the IRS will follow what the decree indicates under certain conditions. For post 2008 decrees the IRS will follow a Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) to allow a non-custodial parent to claim a child. If there is one in place, the IRS will follow it. However, the custodial parent can revoke Form 8332. The reality is that the IRS does not enforce post 2008 divorce and separate maintenance decrees regarding claiming of children on tax returns. That has to be handled by taxpayers through mutual agreement or through the legal system.
If the parents lived together for the whole year, then the IRS will usually allow the parent with the highest Adjusted Gross Income (AGI) to claim the child.
Please note that not all tax credits associated with children follow the child (some “stay with” the custodial parent), in particular the Earned Income Tax Credit (EITC) and you can read more about that here.
It really is best to avoid issues in the claiming of children on tax returns, but it does take two parties at least to come to an agreement. Maintaining communication and cooperation is the key to avoiding conflict. Using Form 8332 for the tax years a non-custodial parent will be claiming a child is important for reducing the possibility of conflict and tax issues as well.
