If you are divorced and have children, only one parent can claim the dependency exemption worth $3,300 each qualifying child on 2006 tax returns. The parent who claims the dependency exemption is also entitled to the $1,000-per-child tax credit for kids under 17, assuming your income is not too high. (You lose some or all of the credit if you file a married filing separately return and your income exceeds $55,000 or claim head of household status and your income tops $75,000.)
Normally, who gets to claim a child as a dependent is a pretty straight-forward decision. Either your divorce decree names the custodial parent. If your divorce documents are silent on the issue, then it's a simply matter of time: You are considered the custodial parent if you child lived with you for a longer period during the year than with your ex.
It's even possible for the non-custodial parent to claim the exemption if the custodial parent signs a waiver pledging that he or she won't claim it. (The non-custodial parent should attach the waiver, Form 8332, to his or her tax return.)
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But what happens if your ex doesn't play by the rules and claims a dependency exemption that's rightfully yours? Well, things could get messy for awhile.
If your ex beats you to the punch and files his or her tax return first, it is possible that he or she would be allowed the exemption -- at least temporarily, says IRS spokesman John Lipold. But once your return enters the system and the IRS computers detect a duplicate Social Security number (your child's) being claimed by another taxpayer, the fun begins. "The IRS would look at both returns, and if the parents can't agree on who claims the exemption, then the IRS would apply the tie-breaker rule," Lipold says.
The tie-breaker rule dictates that if two parents both claim the same child as a dependent, the IRS will decide in favor of the parent with whom the child lived for the longer period of time during the year. And if the child spent an equal time with each parent, then the parent with the higher adjusted gross income gets the exemption.
But all that could take a while. In the meantime, your tax return could be adjusted to reduce your refund or increase your amount of tax due until the dependency issue is resolved. It could even trigger an audit. Once the issue is resolved, the parent who wrongly claimed the exemption would be required to repay the tax, plus interest and penalties.
For more information, see our Life Stages section on divorce and taxes or consult IRS Publication 504, Divorced or Separated Individuals.
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