Category: Tax Law

The IRS uses specific guidelines based on custody arrangements to determine who can claim a child as a dependent for tax purposes. One key factor that often arises in disputes is where the child spent the majority of nights during the tax year. Understanding these rules is essential for family law attorneys advising clients in divorce and custody cases.

The Majority-of-Nights Rule

The IRS considers the custodial parent as the one who can claim the child as a dependent. The custodial parent is the parent with whom the child spent more than half the nights (183 nights or more) during the calendar year. This rule applies regardless of what a divorce decree or custody agreement may specify.

Here are the basics of how the IRS calculates this:

• Counting Nights: A night is one in which the child sleeps at a parent’s residence, even if the child is temporarily absent due to special circumstances, like illness, school trips, or summer camp.
• Shared Time: If the child spends an equal number of nights with both parents, the IRS will turn to tie-breaker rules, prioritizing the parent with the higher adjusted gross income (AGI).

Exceptions to the Rule

Sometimes, the noncustodial parent may claim the child as a dependent. For this to happen, the following conditions must be met:

1. Custodial Parent Releases Claim: The custodial parent must sign IRS Form 8332, releasing their claim to the dependent.
2. Form Submission: The noncustodial parent must attach Form 8332 to their tax return to claim the child.

Without this signed form, the IRS will default to the custodial parent’s claim, even if the divorce decree assigns dependency to the noncustodial parent.

Common Issues

• Mistakes in Counting Nights: Parents may miscount the number of nights a child spent with them, leading to duplicate claims. This often triggers an IRS audit or denial of both parents’ claims.
• Confusion with Decrees: Many parents assume that the terms of a divorce decree are binding on the IRS. However, the IRS follows its own rules, which can override the decree unless Form 8332 is properly executed.

Tips for Family Law Attorneys

1. Keep Accurate Records: Encourage clients to maintain a calendar or log of where the child spent each night. This is especially important for parents with shared custody arrangements.
2. Address IRS Forms in Agreements: Include provisions in divorce decrees about who will claim the child and ensure the custodial parent agrees to sign Form 8332 if the noncustodial parent is to claim the dependent.
3. Explain Tie-Breaker Rules: Educate clients about how the IRS resolves disputes if custody is evenly split.

Family law attorneys can help clients avoid confusion, missed tax benefits, and potential IRS audits by emphasizing the importance of the majority-of-nights rule. Proper planning and record-keeping are key to navigating these rules successfully.

The U.S. tax code has become a maze of regulations that overwhelms taxpayers and consumes billions of hours annually. The National Taxpayers Union Foundation estimates Americans spend 6.5 billion hours on tax compliance, costing over $280 billion per year. Simplifying the code isn’t just about saving time—it’s about ensuring fairness and restoring trust in the system.

The Challenges of a Complex Tax Code

The tax code’s complexity disproportionately affects those with fewer resources. While the wealthy and corporations can afford accountants to minimize taxes, middle- and low-income taxpayers often struggle. Programs like the Earned Income Tax Credit (EITC), meant to help low-income individuals, are so complicated that millions miss out entirely. Simplification would level the playing field and reduce errors.

Taxable income calculations add further frustration. Determining how much Social Security is taxable involves multi-step formulas comparing adjusted gross income (AGI), nontaxable interest, and half of benefits against thresholds based on filing status. These rules confuse taxpayers and lead to errors. Simplifying such provisions would ease the burden.

---

How Simplification Can Be Achieved

• Consolidate Deductions and Credits
  To simplify eligibility and reduce confusion, similar benefits, such as tuition expenses, student loan interest, and education credits, can be combined into one “Education Expense Deduction.”
• Expand Pre-Filled Tax Returns
  The IRS could pre-fill returns for taxpayers with straightforward situations, like W-2 earners, using existing records. Filing would then be as simple as reviewing and submitting.
• Eliminate Corporate Income Taxes
  Corporate taxes are passed on to consumers through higher prices, employees through lower wages, and shareholders through reduced returns. Eliminating them would remove this hidden tax, address the double taxation problem on corporate earnings, and encourage reinvestment in growth and innovation, keeping business investment strong.
• Eliminate Special Capital Gains Tax Rates
  Replace reduced rates for long-term gains with an inflation-adjusted basis for long-term assets. For example, a $10,000 stock bought 20 years ago that has doubled with inflation would have an adjusted basis of $20,000, taxing only real gains. This would ensure fairness while simplifying the system.
• Automate Tax Benefits
  Automatically applying credits like the Child Tax Credit using IRS records would reduce errors and ensure eligible taxpayers don’t miss out.

---

A Path Forward

The tax code has grown increasingly complex over time, piling on burdens for taxpayers. The last significant simplification came with the Tax Reform Act of 1986. Now is the time for another overhaul. By consolidating deductions, automating benefits, eliminating corporate taxes, and reforming capital gains taxation, we can save millions of hours and restore simplicity to the system.