Two types of exemptions are allowed – personal and dependents. There are special situations for a noncustodial parent of divorced or separated parents to claim a dependent and situations where several persons may contribute to the support of another person.

Personal Exemptions

These are for the taxpayer(s) filing the return – one for single, head of household, and married filing separate, and two for married filing joint. Each personal exemption is $3,900 for 2013 ($3,950 for 2014).

Dependents Exemptions

Tax payers are allowed one exemption for each dependent who must at some time during the year, qualify as a:

(a) Citizen of the U.S.

(b) U.S. national who has permanent allegiance to the U.S.-one born in American Samoa or the Northern Mariana Islands who has not become a naturalized American citizen.

(c) Resident of Canada or Mexico.

If a child is born outside the U.S., one of the parents is a non-resident alien and the other parent is a U.S. citizen, the child qualifies as a dependent if the other exemption tests are met. If a U.S. citizen or national adopts a child legally who is not a U.S. citizen, or the child was placed with the taxpayer for adoption, and the child lived in the taxpayer’s household the entire year, the child is treated as a U.S. citizen or resident and can be claimed as a dependent if the other exemption tests are met.

An additional test that must be met is that the individual must be a qualifying child or relative The IRS has specified the following tests:

Qualifying Child

(1) The child must be your son, daughter, stepchild, brother, half brother, sister or half-sister, or a descendant by any of them.

(2) The child must be younger than taxpayer or spouse (if filing jointly), under age 19 (age 24, if a full time student) at the end of the tax year.

(3) The child can be any age if permanently and totally disabled.

(4) The child must have lived with taxpayer for more than half the year.

(5) The child must not have provided more than half of his or her own support for the year.

(6) The child does not file a joint return with his or her spouse (unless a return is being filed only to claim a refund)

Qualifying Relative

(1) The person cannot be a qualifying child of the taxpayer or any other person.

(2) The person must be either related to you (and not be in violation of the law) or live with you the entire year as a member of your household.

(3) The person’s gross income must be less than the amount of the personal exemption ($3,900 for 2013). There is an exception to this if the child is disabled and has income from a sheltered workshop. Other exceptions pertain to children of divorced or separated parents, or who live apart, kidnapped children and dependents claimed under a multiple support agreement.

(4) Unless they qualify as a child or relative, housekeepers, maids, and servants who work for you cannot be claimed as an exemption.

Release of Exemption-Divorced or Separated Parents

The IRS allows the parent with whom the child lives for the greater part of the year (custodial parent) who is allowed to claim the exemption, to release the exemption to the non-custodial parent. Three conditions must be met:

(1) the child receives more than half of the total support for the year from one or both parents. This does not apply if a parent and other individuals provide more than half support under a multiple support agreement (See below).

(2) the parents are divorced or separated under a written divorce or separate maintenance agreement, or live apart at all times during the last six months of the year (this includes parents never married to each other)

(3) One or both parents must have custody for more than half of the year.

The custodial parent is the one with whom the child resides the greater number of nights during the year. If a child is temporarily absent (e.g., away at school), is treated as residing with the parent with whom the child would have normally resided with on those nights. If the child resides with both parents the same number of nights during the year, the parent with the higher AGI is considered the custodial parent.

If the non-custodial parent is not entitled to the exemption, the custodial parent can agree to let the non-custodial parent claim the exemption if he or she completes form 8332, or other written agreement. Form 8332 or the other written agreement must be attached to the tax return, or e-filed with the return, of the non-custodial parent for the tax year the exemption is released. The custodial parent has the option to release the exemption for any or all future years or until it is revoked. The waiver can’t be conditioned on payment of support, or meeting some other obligation, by the non-custodial parent. If a post-1984 divorce/separation agreement executed before 2009, indicates that the non-custodial parent has the unconditional right to claim the child’s exemption and the custodial parent is waiving the right for a specified year(s), the non-custodial parent can attach the relevant pages from the divorce/separation agreement instead of attaching form 8332 or other written agreement. The relevant pages to be attached are: those that give the non-custodial parent the unconditional right to claim the child’s exemption, the page showing the custodial parent’s waiver, the page with the custodial parent’s Social Security number, and the page with the custodial parent’s signature and date of the agreement. The option to attach pages from the divorce/separation agreement cannot be used if the decree/agreement was executed after 2008. In this case, the non-custodial parent must obtain the consent of the custodial parent on form 8332 or similar written release and attach it to his or her return or e-file it with the return. The custodial parent has the right to revoke the exemption release by completing part III of form 8332 and giving it to the non-custodial parent. The effective date of the revocation will be the year after the year it is given to the non-custodial parent. The parent making the revocation must attach form 8332 to the tax return for each year the exemption is claimed.

Form 8332 is below

The divorce decree may specify which parent is the custodial parent and which parent is entitled to a dependency exemption. The formalities, however, don’t always control. In one recent case, when a couple divorced, the father of their two children was designated at the custodial parent but there was no mention of which parent was entitled to dependency exemptions. In the two years that the IRS contested the mother’s claim of exemptions, both children lived with her for more than half of year 1, and one child lived with her for more than half the year in year 2. The Tax Court allowed her dependency exemptions (two for year 1; one for year 2) [D. White, TC Summary Opinion 2013-77]. Because the mother was the custodial parent, she was entitled to the exemptions. The fact that the divorce decree designated the father as the custodial parent isn’t controlling. Because he did not have the requisite physical custody to be the custodial parent, no waiver (Form 8332) was required in order for the mother to take the exemptions

Multiple Support Agreement

Many times several persons may contribute more than 50% of the support of an individual but no one person contributes more than 50% of the support. In this case the person who meets the support test is the one who:

(1) provides more than 10% of the support.

(2) the amount contributed by all persons is more than half of the support.

(3) Each contributor was eligible to claim the exemption except 50% of the support was not provided by any one contributor.

(4) Each person providing more than 10% of the support who agrees to let one person take the exemption, must sign a separate form 2120, Multiple Support Agreement and the person claiming the exemption must attach the forms to their return or e-file it with the return.

Example 1

John, Mike, and Harold each contributed $4,000 and their two sisters contributed $1,000 each for the support of their mother who resides in a nursing home. Their mother contributed $2,000 for her support. Her total support contributed by everyone is $16,000. Of this amount, Harold, Mile, and Harold each contributed 25% (total 75%). Each daughter contributed 6%. Since the daughters did not contribute more than 10%, neither of them can claim the exemption, but either of the sons may and they must decide amongst themselves who will claim the exemption. The sons not claiming the exemption, must sign a separate form 2120 and give it to the son who will claim the exemption and he must attach the forms to his return or e-file it with the return. Neither daughter has to sign form 2120 because they contributed less than 10%.

Example 2

A taxpayer’s total support is $20,000. The following contributed to her support: husband $3,200; oldest son $6,000; youngest son $4,000, and

taxpayer $6,800. Her husband does not file a tax return claiming his wife as an exemption. The sons cannot use their father’s contribution to meet the more than 50% test. The husband cannot join in with the sons for a multiple support agreement because his wife is not his dependent for tax purposes. But he can claim an exemption for her on a joint return.

Form 2120 is shown below.

Taxpayers can claim exemptions for their children or others by carefully adhering to the IRS guidelines and tests for claiming a dependency exemption. This is important because if the tests are not met, the IRS will disallow the exemption resulting in assessment of additional taxes and interest. Also, if the dependency exemption is taken, it may allow a taxpayer to file as head-of-household status which produces less tax than married filing separate. It also determines eligibility for the child tax and/or earned income tax credits. However, high-income taxpayers may not benefit from the dependency exemption despite eligibility to claim it. Starting in tax year 2013, the deduction for exemptions phases out for those AGI over certain threshold amounts

If several persons provide the support of another taxpayer, they should carefully consider which one will take the exemption under the multiple support agreement. It could be the one with the highest AGI to get the maximum tax savings or the individuals may agree to alternate each year on who is claiming the exemption.

Portions of this post referenced J.K. Lasser’s Your Income Tax, 2013

In accordance with Circular 230 Disclosure