Incident to a divorce, one question that must be settled between the two spouses is “Who gets to claim the children on their taxes?” It is most commonly thought that reference to the divorce decree (Qualified Domestic Relations Order or QDRO). However, this may not be the case.

Under IRS rules children of unmarried parents are claimed as dependents on the custodial parent’s return. The custodial parent is determined strictly by a time test. The qualifying child must have the same principal place of residence as the taxpayer for more than half the year if the taxpayer is to qualify as the custodial parent. In addition, the parent must have the right under state law to physical custody for more than half the year. This can be an issue when a non-parent (such as a grandparent) has custody.

Time spent with each parent is determined by the “Nights Over” Rule. The custodial parent is the one with whom the child spent the night for over half the year, and the parent must be able to prove the number of nights the child stayed in his/her residence. A diary, or record, of nights spent should suffice if it is believed to be a contemporaneous record and not one concocted in order to prove custody.

It is also worth noting that life will be made much easier for the custodial parent if he or she files before the other parent. Generally speaking, the first parent to file wins. The second parent must then challenge the claiming of dependency with a resulting IRS investigation and a delay in getting the full refund. Even if the second parent is properly claiming the exemption.

There is more to having custody than simply taking the dependency exemption. Other tax benefits accrue to the custodial parent – head of household status, Child Tax Credit, Earned Income Credit, Education Credits, and the Child Care Credit. Lose the custody battle and you lose all of these.

The IRS will allow the custodial parent to release the exemption to the non-custodial parent by completing Form 8332. This form must be attached to the non-custodial parent’s return every year that the exemption is claimed. There are cases in which the parent had a valid Form 8332 but failed to attach it to the return. The IRS denied the taxpayer’s claim that of the right to the exemption.

This release only applies to the dependency exemption, Education Credits, and the Child Tax Credit. The custodial parent is still entitled to head of household status, the Earned Income Credit, and the Child Care Credit. Should the custodial parent have a change of heart, the release can be revoked by filing Form 8332 with Part III completed.

As it is with many things in the world of tax, one should always keep good records and not simply rely on verbal assurances. If challenged, you will lose without proper documentation. Second, seek the advice of a qualified CPA, Enrolled Agent, or other tax professional. Getting it right is easier and less expensive than trying to fix it later.