Who gets custody of the exemptions? Should you file jointly one last time?

1. Tax “custody” is different.

These days, family courts often award “joint” custody of a child–joint legal custody and sometimes joint physical custody too. In the tax world there is no such thing. Custody, meaning the $3,650 dependent exemption for a child and the $1,000 child tax credit belongs to the parent in whose home the child spends more nights.

What often happens in the real world is that parents with joint custody haven’t resolved who gets tax custody and so both claim the child. The parent who files his or her 1040 first gets the exemption/credit. When the second to file claims the child, his or her refund is held up. Both then receive an IRS notice saying a dependent was claimed twice, and requiring each to submit proof of entitlement to the dependent. So mark your calendars the nights your children stay with you so you will have “contemporaneous records” to prove your claim for tax custody. (Days may be used for parents who work nights.)

2. Tax custody can be assigned–but only for some purposes.

It is possible for the parent without physical custody to claim the $3,650 dependent exemption, but the custodial parent must sign a Form 8332 allowing the non-custodial parent to do this. Moreover, if someone claims a child by reason of a signed 8332, that does not make him/her entitled to all the deductions and credits a parent with true physical custody would receive. Certain deductions go to the parent who claims the child and others go to the custodial parent whether or not he/she claims the child. For example, the child tax credit always goes to the person who claims the child, as does the up-to-$2,500 American Opportunity Credit for college. But the earned income tax credit, worth up to $5,657, and the dependent care credit, worth up to $2,100, can only be claimed by the custodial parent. Warning: A noncustodial parent is not entitled to divert pretax salary into a dependent care account at work, and if he or she does so, the amount must be added back into income. (For more on the dependent care accounts and credits, click here.)

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