Saturday, January 3, 2009

The "No King Solomon" rule

Who gets to claim the tax benefits for a "qualifying child" and can those benefits for a given "qualifying child" be "split" among different taxpayers?

Thes questions (both on the certification exam and in actual practice with clients) give preparers more trouble than any other type of problem.

A qualifying child can very easily be worth thousands of dollars in combined Federal and New York State tax refunds to the adult who gets to claim them.

As you now know from your study of tax law, frequently there may be multiple adults living in a household with a qualifying child, each of whom may be eligible to claim the child on their return. If the adults can't agree, there is a definite "pecking order" tie-breaking system imposed by the IRS (which is described at the bottom of page C-3 in Tab C of your Pub 4012. Tab C of Pub 4012 has all the answers to your questions--you just have to read it very carefully!)

You also know that a given "qualifying child" can generate many different tax benefits: dependent exemption, Child Tax Credit and/or Additional Child Tax Credit, Child Care tax credit, Earned Income Tax Credit, Education Tax Credits, qualification for Head of Household filing status, and more.

So it's very natural for taxpayers to ask what I call the King Solomon question: "Can the tax benefits for a qualifying child be split among multiple taxpayers?"

In general , the answer to the King Solomon question is NO,
(with a very special and narrow exception for divorced or separated taxpayers)

Examples


1) Multiple children can be split in a household Example: If there are multiple "qualifying children" within a household and several adults eligible to claim them, the DIFFERENT CHILDREN can be split across taxpayers. If mom, grandma, and Uncle Bill lived with three kids last year and all met the criteria, mom trumps grandma and Uncle Bill, and she has first claim on all of them. However, mom can say, "I'll take Johnnie on my return, Grandma can take Jill, and Uncle Bill can take Susie."

2) "NO King Solomon rule" Example However, the tax benefits associated with a particular child can NOT be split across taxpayers. Mom can't say, "I'll claim the EIC for Johnnie, but Uncle Bill can take Johnnie's personal exemption."

3)EXCEPTION to "No King Solomon Rule" for non-custodial parent

Example:
There is only ONE limited exception to rule #2. If there is a non-custodial parent in the picture, the custodial parent has the option to sign a Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents. However, this only releases the Personal Exemption and Child Tax Credit, and Additional Child Tax Credit eligibility to the noncustodial parent. The other tax benefits for the Qualifying Child (EITC, DC, and HoH filing status) ALWAYS remain with the parent who lives with the child---under no circumstances can they be given to a taxpayer who does not live with the child for at least half a year.

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