Recently in Taxes Category

November 3, 2008

Dependent Exemption May Be Claimed By Both Divorced Parents

Until now, divorced parents had to negotiate about who got to take the I.R.S. dependent exemption for each of their children. In general, the primary custodial parent has been entitled to the dependent exemption because the child usually lives with that parent more than 50% of the time. But often the non-custodial parent is the higher wage-earner and would benefit more from the exemption, so the I.R.S. would allow the custodial parent to sign a waiver allowing the non-custodial parent to take the exemption instead.

This is still the general rule for dependent exemption purposes, but it's no longer an either/or proposition for all purposes under a recently issued IRS Revenue Procedure. (There's also a very clear explanation of the new guidance on the McGuire Woods website.) Now, the IRS will treat a child as a dependent of both parents for purposes of tax treatment of Medical Savings Accounts (MSA) and Health Savings Accounts (HSA), as well as certain other fringe benefits of employment. For federal income tax purposes, both parents can now treat their children as dependents even if no waiver has been signed by the custodial parent, meaning that both can exclude from their gross income any money taken from an MSA or HSA and used for qualifying medical expenses.

This may seem quite technical, but for parents who use MSAs and HSAs, it's good news. Both parents can benefit from treating the child as a dependent, and they no longer need to negotiate (or argue) about who gets that tax benefit.