Child custody is one of the most challenging topics for divorced parents to discuss. In especially nasty disputes, a divorcing couple can argue over everything, from custody of a child to financial assets. But for divorcing parents who are looking for mutually beneficial solutions, tax benefits can be a place to start.
Normally, the custodial parent receives the tax benefits on behalf of their dependent children. But there are times when it might be better for the custodial parent to allow the non-custodial parent to take those tax benefits instead.
And that is where IRS Form 8332 comes in.
What is Form 8332?
IRS Form 8332 is titled, “Release/Revocation of Release to Claim to Exemption for Child by Custodial Parent.”
According to Section 152(e)(2) of the tax code, the custodial parent can release their claim to any child or dependent related tax exemption with a written declaration. That written declaration must:
- Be signed by the custodial parent, as IRS regulations prescribe, so that the custodial parent does not claim the child as a dependent for that calendar year
- Be attached to the noncustodial parent’s tax return for that year.
So Form 8332 serves as that written declaration. But before we go too much further, we should talk about the difference between the custodial and non-custodial parent.
Who is the custodial parent?
For tax purposes, the custodial parent is the parent with whom the child spent the majority of the year. Specifically, the IRS defines this as the greater number of nights during the taxable year.
This might be different from the definition of custody as defined by state law.
In a typical 365 day calendar year, the parent who spent 183 nights (or more) with the child is naturally the custodial parent.
If the child spent an equal number of nights with each parent, then the custodial parent is the parent with the higher adjusted gross income. This might happen in a leap year (366 days). It could also occur if the child spends a number of nights with another person (like a grandparent).
IRS Publication 501 outlines more detail and exceptions where one (or both) of the parents work at night.
Let’s discuss what tax benefits are we talking about. And what tax credits aren’t covered.
What tax benefits can be transferred?
Generally speaking, when a couple divorces, only one parent is able to claim a tax exemption (and any related tax credits) for each dependent child. According to the tax law, that exemption usually goes to the parent who has custody of that child.
Currently, under the tax law changes in the Tax Cuts and Jobs Act, the tax deduction for a personal exemption has gone away. So you get zero tax deductions for the child as a personal exemption.
But that child dependency exemption allows the parent to claim tax credits. And in order for the noncustodial parent to benefit from the related tax credits, the custodial credit has to sign Form 8332 relinquishing their claim to the credits.
Applicable tax credits
Form 8332 applies to the following tax benefits:
- Child tax credit
- Additional child credit
- Credit for other dependents, if applicable
In other words, by filing Form 8332, the custodial parent allows the noncustodial parent to claim those credits. But just because a parent signs Form 8332 doesn’t mean that the noncustodial parent automatically gets those benefits.
Tax benefits not covered
Form 8332 doesn’t apply to everything. Below are some of the tax benefits that this tax form does not convey, and an explanation for each.
Earned income credit
According to the tax rules, you do not necessarily have to have a child to claim the earned income tax credit (ETIC). You have to meet the following basic criteria:
- Have earned income under the EITC threshold ($57,414) for tax year 2021
- Have investment income under $10,000 in the current tax year
- Have a valid Social Security number by the time you file your tax return
- Be a U.S. citizen or resident
- Not file Form 2555 (Foreign Earned Income Tax Exclusion)
You also have to:
- Have resided in the United States for over 50% of the tax year (not including Guam, Virgin Islands, or Puerto Rico).
- Be at least 18 years old by the time you file your tax return
- Not be claimed as a dependent on another household’s tax return
There are additional considerations for servicemembers, clergy, and taxpayers with disabilities.
Child and dependent care credit
The IRS website states that only the custodial parent can claim the child and dependent care credit. This credit is not transferrable to the noncustodial parent.
And the custodial parent can only claim the credit if they are claiming on behalf of a qualifying child. To be a qualifying dependent, a child must:
- Be under age 13 or otherwise not care for himself or herself
- Have received over half of his or her support during the calendar year from one or both parents, if the parents are:
- Legally separated under a divorce decree or a decree of separate maintenance
- Separated under a written separation agreement, or
- Have lived apart at all times during the last 6 continuous months of the calendar year
- Child was in the custody of one or both parents for more than half of the year
- Have a Social Security number or other taxpayer identification number
Head of household filing status
To qualify as head of household, a taxpayer must:
- Be unmarried or considered unmarried on the last day of the year
- Pay more than half the cost of keeping up a home for the year, and
- Have a qualifying person live with them for more than half the year (unless that person is a dependent parent, which falls under special IRS rules)
However, both the custodial and non-custodial parent can claim head of household status, if each person individually qualifies. For example, a non-custodial parent could claim as head of household if that person is responsible for another dependent (like an aging parent).
Let’s discuss the mechanics of filling out Form 8332.
How to properly complete Form 8332
According to the IRS, a separate Form 8332 is filed for each child. There are three parts to Form 8832.
Regardless of which part (or parts) are completed by the custodial parent, the non-custodial parent’s name and Social Security number are entered at the top.
Let’s take a look at each part of the form in more detail.
Part I-Release of Claim to Exemption for Current Year
The custodial parent completes this part to release their claim to the child exemption for the current tax year. The custodial parent will sign, date, and attach their SSN at the bottom of Part 1.
If the custodial parent wants to include future tax years, they must also fill out Part 2.
Part II-Release of Claim to Exemption for Future Years
The custodial parent completes this part to release their claim to the child exemption for future tax years. According to the IRS instructions, the custodial parent may cite specific tax years, or simply state, “all future years.”
The custodial parent will sign, date, and attach their SSN at the bottom of Part 2.
If the custodial parent wishes to relinquish their exemption claim for the current AND future tax years, then that parent would complete Parts 1 and 2.
Part III-Revocation of Release of Claim to Exemption for Future Year(s)
If the custodial parent chooses to revoke their previous release of claim, then he or she will complete Part 3. As with Part 2, the custodial parent can state specific years, or simply write, “all future years.”
However, the revocation will only work for future years, not the current tax year.
For example, Mary, a custodial parent, previously relinquished her exemption for tax years 2018 through 2025. In 2022, Mary decides to file Form 8332 to revoke her previous release. That revocation will take effect for tax year 2023 through 2025, but not 2022.
In addition to properly completing Form 8332, it’s important to recognize who must file it with the IRS.
Who is Responsible for Filing Form 8332?
Generally speaking, the parent who is claiming the exemption for the given tax year will file Form 8332 with their income tax return. It’s best to have this form completed well before tax season starts. That will allow each person’s tax accountant the opportunity to understand the tax impact of their client’s situation.
If Part 1 or Part 2 are completed, then the non-custodial parent would attach the Form 8332 to their tax return for each year they claim the exemption. If the custodial parent completes Part 3, then the custodial parent would attach the newly completed form to their tax return for each year that they claim the exemption.
Of course, it’s a good practice for both parents to keep copies of each signed form with their tax records. That way, if anything comes up, they can discuss it with their tax expert.
When would a custodial parent give up their exemption?
This could be something that is determined as part a child support order, other court order, or as part of a support agreement. But that is beyond the scope of this article.
Instead, let’s focus on another question:
When would it make sense for the custodial parent to voluntarily give up their exemption?
Let’s assume that tax efficiency is the goal, for both households. As a general rule, the parent with the higher income should claim the exemption. This will allow them to maximize the tax benefits from the associated tax credits. But not always.
If the parent who would claim the credit earns too much income, then he or she might be subject to a phaseout.
A phaseout is when a tax credit or deduction is gradually reduced in proportion to the income above a certain threshold. Then, after a certain amount, that credit or deduction disappears completely.
Child tax credit phaseout
In 2021, there are two income-based phaseouts. The first phaseout, introduced as part of the American Rescue Plan bill passed in 2021, reduces the child tax credit from $3,600 to $2,000.
First child tax credit phaseout
It applies to taxpayers whose modified adjusted gross income (MAGI) exceed the following:
- $150,000 if you are married and filing a joint return, or if you are filing as a qualifying widow or widower;
- $112,500 if you are filing as head of household; or
- $75,000 if you are a single filer or are married and filing a separate return.
Taxpayers who meet this criteria will see their child tax credit reduced by $50 for every $1,000 above the threshold. The phaseout is reduced to $2,000 for taxpayers whose MAGI exceeds:
- $169,000 if you are married and filing a joint return, or if you are filing as a qualifying widow or widower;
- $131,500 if you are filing as head of household; or
- $94,000 if you are a single filer or are married and filing a separate return.
Second child tax credit phaseout
The second income-based phaseout for the child tax credit impacts high-earning taxpayers. Specifically, taxpayers whose MAGI exceeds:
- $400,000 if married and filing a joint return; or
- $200,000 for all other filing statuses.
Taxpayers who meet this criteria will see their child tax credit reduced by $50 per $1,000 above this threshold until reduced to zero.
Child and dependent care tax credit phaseout
IRS Publication 503, Child and Dependent Care Expenses, discusses the income phaseout for this tax credit. This credit normally assigns a percentage of the costs of care as the tax credit. Full credit is considered 50% of the cost.
For example, if you spent $4,000 in 2020 for child care, and you received the full benefit of the child care tax credit, then you would receive $2,000, or 50% of the cost of the care.
This phaseout is not a dollar value, as in the child tax credit, but a sliding percentage based upon income. Based on the tax law changes in the American Rescue Act, this phaseout starts at $125,000 (for all taxpayers, except for married couples filing separately), and ends at $438,000.
The full phaseout schedule for this tax credit is located in the instructions for IRS Form 2441, Child and Dependent Care Expenses.
For a divorced couple, it’s important for both former spouses to be on the same page. Knowing how to fill out Form 8332 can help both parents of a child to properly report their child’s tax exemption status to the Internal Revenue Service.
However, this article does not constitute tax, financial, or legal advice. It is written for general information purposes only. Before moving forward, you should discuss this topic in depth with your financial, tax, or legal office.