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Tax Tip for Never Married Dads

January, 2004
PLEASE NOTE:

The Internal Revenue Service has (once again) changed its interpretation of the law regarding the special support test for divorced and separated parents.

The "Tax Tip for Never Married Dads" that previously appeared at this website (below), explaining the circumstances in which a never-married non-custodial parent of a child born out-of-wedlock could claim the child dependency exemption, should be disregarded.

For the past several years, it was the official Internal Revenue Service (IRS) position that the entitlement to claim the tax exemption for a child of never-married parents was not controlled by the "special support test" (commonly known as the "custody rule") but rather by the "regular support test" (taxpayer must have provided more than 50% of the dependents total support).

That has now (once again) changed. Effective with the 2003 tax year, IRS now says the "custody rule" DOES apply to never-married parents. The change of IRS position is apparently the result of the decision of the US Tax Court in the case of King and Lopez v. Commissioner, 121 TC #12 (9/26/2003), which gave a revised interpretation to Internal Revenue Code § 152(e), the law creating the "special support test" for divorced and separated parents.

So, for tax years 2003 and thereafter . . . .

The "Tax Tip for Never Married Dads" that previously appeared at this website, explaining the circumstances in which a never-married non-custodial parent of a child born out-of-wedlock could claim the child dependency exemption, should be disregarded.

In view of the US Tax Court decision in the King/Lopez case and in view of the recent change of the IRS position, a non-custodial never-married parent should NOT claim the child as a dependent (regardless of how much support was paid) UNLESS the non-custodial parent's tax return is accompanied by a completed IRS Form 8332 signed by the custodial parent.





TAX TIP FOR FATHERS OF CHILDREN BORN OUT OF WEDLOCK:
CLAIM THE CHILD AS YOUR DEPENDENT


Custody Does Not Matter -- Form 8332 is Not Required.

By Lawrence D. Gorin
Attorney at Law
Portland, Oregon
(revised January, 2003)
© L.D. Gorin, 2003



One of the five tests is the "support test." To satisfy the "support test," the taxpayer claiming the exemption must have provided more than half of the dependents "total support" for the tax year in question.

However, where the dependent is a child whose parents are divorced or separated (meaning parents who are divorced or legally separated under a decree of divorce or separate maintenance, or separated under a written separation agreement), the IRS has a special rule, known as the "SUPPORT TEST FOR CHILDREN OF DIVORCED OR SEPARATED PARENTS."

Under the special "support test" rule, the custodial parent is automatically treated, i.e., "deemed," as having provided more than half of the childs total support during the tax year (and is therefore entitled to claim the child as her dependent), regardless of factual reality. It does not matter how much money was actually paid by the other parent (usually the non-custodial dad) even if hes the one who actually provided MORE than half the childs total support. The section of the Internal Revenue Code that is the basis for the special "support test" rule for divorced or separated parents is found in subsection (e) of 26 USC § 152. (Go to weblink and scroll down to subsection "(e)".)

For support orders after 1984, the special IRS rule for divorced or separated parents bars the non-custodial parent from claiming the dependency exemption unless (1) the custodial parent gives written consent to the non-custodial parent, usually done by using IRS Form 8332, or (2) there is a court decree that clearly gives to the non-custodial parent the "unconditional right" to claim the dependency exemption (meaning that he has the absolute right to claim the exemption without having to meet any special conditions, such as, for example, being up-to-date in support payments, etc.).

However, it needs to be clearly understood that the special "Support Test for Children of Divorced or Separated Parents" applies only to:

  • Parents who are divorced from one another or legally separated under a decree of divorce or separate maintenance.

  • Parents who are married to one another but who are separated under a written separation agreement.

  • Parents who are married to one another but who lived apart at all times during the last 6 months of the calendar year.

The "Support Test for Children of Divorced or Separated Parents" does NOT apply to parents who have never married one another. Where parents of a child born out of wedlock have never married one another, the "regular" support test applies, not the special support test that applies to divorced and [legally] separated parents.

In practical terms, this means that custody is not a relevant factor in determining the dependency exemption when the parents of the dependent child have never been married to one another. So if the non-custodial father of a child born out of wedlock provided more than half of the childs total support, he is entitled to claim the child as his exemption, regardless of which parent had custody (and assuming, of course, he meets each of the other four IRS tests for claiming the dependency exemption).

Although this has been the law for many years, until recently it was not clearly explained in the various IRS publications discussing the subject. That situation has now changed. Now, in IRS Publication 501 (2002 ed.) "Exemptions, Standard Deduction, and Filing Information," at the end of the section discussing the support test rule for divorced and separated parents, at page 17, it says:

"Parents who never married. These special rules for divorced or separated parents do not apply to parents who never married each other. If this is your situation, you must provide more than half the support of your child or enter into a multiple support agreement, as discussed earlier, to satisfy the support test."



And in IRS Publication 504 (2002 ed.) "Divorced or Separated Individuals Exemptions, Standard Deduction, and Filing Information," at page 8 (in section discussing the special support test rule for divorced and separated parents), it says "The special rule does not apply if: The childs parents never married each other."

Also, IRS Publication 17 (2002 ed.), at page 34, after again explaining that the special rules for divorced or separated parents do not apply to parents who never married each other, the following example is given:

Example. You never married the father of your child and do not live with him, but he provides the home you and your child live in. The fair rental value of the lodging he provides to your child is $3,000 a year. You provide the rest of your child's support for the year, which is $1,200. The special rules for a child of divorced or separated parents do not apply because you and the child's father never married. As a result, you cannot claim an exemption for your child because you did not provide more than half of the child's support.

OFFICIAL WORD FROM THE IRS on this important point may be found in IRS Chief Counsels Letter Ruling No. 1999 49033, released Dec. 10, 1999, answering the question "Does the special support test in section 152(e)of the Internal Revenue Code apply to determine if a child is a dependent of one of two parents who have never married each other?" According to the Chief Counsel for IRS, the answer NO, the special support test does not apply.

Finally, take at look at the IRSs official Tax Trails website, designed to help with individual tax return preparation. In particular, in the section dealing with "Dependents," the admonition is again given that "These special rules do not apply to parents who never married each other."

It should now be clear that the language in IRS Code section 152(e)(1)(A)(iii)referring to "parents who lived apart at all times during the last 6 months of the calendar year" applies ONLY to married parents who lived apart at all times during the last 6 months of the calendar year. If the childs parents never married each another, whether they "lived apart at all times during the last 6 months of the calendar year" is of no consequence.

In sum, for federal income tax dependency exemptions for children, the question as to which parent has CUSTODY applies only in cases where the parents are (1) divorced or legally separated under a decree of divorce or separate maintenance; (2) separated under a written separation agreement; or (3) married but living apart at all times during the last 6 months of the calendar year. If you do not fit into any of these three categories, the IRS "support test for children of divorced or separated parents" does NOT apply you. And if the "support test for children of divorced or separated parents" does not apply, there is no need to use IRS Form 8332. Indeed, IRS Form 8332 now says, right up at the top of the form: "Caution: Do not use this form if you were never married."

If you are the parent of a child born out-of-wedlock, and you and the other parent have never married one another, you may claim the child as your dependent for income tax exemption purposes so long as you meet each of the five IRS "tests" for claiming exemptions, regardless of which parent had custody and regardless of whether they lived together or lived apart. So, if noncustodial father of a child born out-of-wedlock, having never been married to the childs mother, contributes more than half of the childs "total support" (as that phrase is defined by the IRS) he has the right to claim the child as his dependent for tax exemption purposes. And in that situation, he does not need the mothers consent nor does he need IRS Form 8332.

Some Practical Hints . . . .

1. If the father of a child born out-of-wedlock (the parents having never been married to one another) is going to claim the dependency exemption for the child, he should file his tax return as soon as possible after the end of the tax year. In cases where two taxpayers claim the same person as a dependent (as in never-married parents both claiming the same out-of-wedlock child), IRS generally accepts as correct and legitimate the first tax return that is filed. When a second tax return is then filed claiming the same dependent, it will usually be rejected by IRS, thus invoking on the second taxpayer the burden of justifying her/his entitlement for claiming the exemption. So, TAX TIP: File early if you intend to claim your out-of-wedlock child as your dependent.

2. Notwithstanding the statements set forth in IRS Publication 501 and IRS Publication 504 making it clear that the "Support Test for Child of Divorced and Separated Parents" does not apply to parents who have never been married to one another and the admonition at the top of IRS Form 8332 ("Caution: Do not use this form if you were never married."), there are still some local IRS customer service agents who are not yet knowledgeable about this particular point of law and continue to advise never-married taxpayers that the dependency exemption is determined based on the issue of which parent has custody. This is, of course, incorrect. So, TAX TIP: Dont be mislead by local IRS customer service agents who tell you that you cannot claim the child dependency exemption unless you have custody of the child or have consent of the custodial parent. Not so.

Further Information. . . .

Read the section about "Exemptions for Dependents" beginning at page 8 in IRS Publication 501 (for 2002). It gives a detailed discussion about the five "tests" that must be met in order to claim an exemption for a dependent, including, at page 11, the "support test."

According to the IRS, in cases where the "special support test for divorced or separated parents" does not apply, the "general" support test becomes applicable. Under the general support test:

"You must provide more than half of a person's total support during the calendar year to meet the support test. You determine whether you have provided more than half by comparing the amount you contributed to the person's support to the entire amount of support the person received from all sources. This includes support the person provided from his or her own funds."

"TOTAL SUPPORT." To figure if you provided more than half of the support of a dependent, you must first determine the total support provided for the dependent person. "Total support" includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. In figuring a dependent's total support, include support provided by the state (welfare, food stamps, housing, etc.).

NOTE: As construed by the IRS, "total support" is NOT THE SAME as "total support" calculated or determined under your states Child Support Guidelines. A parents percentage of total support as determined under state Child Support Guidelines is not controlling on the IRS and, indeed, is of no meaning to IRS (although the money paid pursuant to a state court child support order is certainly part of the IRS's concept of total support).

----> IRS Publication 501 (2002 ed.), at page 12, contains a WORKSHEET that that may be used to figure out "total support."

If the parent with whom the child resides (lets assume that it is the childs mother) is receiving public assistance (welfare), there is a chance that she might not be filing a tax return. If that is the case, and assuming non-custodial father of the child born out of wedlock takes the position that he has provided more than half of the childs total support for the year, his claiming the child as his dependent will probably not be questioned (even if he is in error in believing that he has provided more than half of the childs total support).

In cases where mother does file a tax return and does claim the child as her dependent, the non-custodial father of the child born out of wedlock should nonetheless claim the dependency exemption himself IF he in fact provided more than half of the childs total support for the tax year in question (and, of course, he meets each of the other four IRS tests for claiming a dependency exemption).

On IRS Form 1040 and Form 1040A, to the right of the section where you fill in the childs name and social security number, you are asked to state the number of children for whom you claim an exemption who "did not live with you due to divorce or separation." If you were never married to the childs mother, this line does not apply to you.

If you have your tax returns prepared by a CPA or other tax professional, be sure to tell him/her that the child is a child born out of wedlock, NOT a child who "didnt live with you due to divorce or separation."

Also, if you could have validly claimed the dependency exemption in a prior year but did not do so because of a misunderstanding as to your right to do so, consider filing an AMENDED tax return s(see IRS Form 1040X) for the tax year in question. It may be worth hundreds, if not thousands, of dollars. (If the other parent did not file a tax return for the year in question, there should be no problem. If the other parent did file a return, your claim may be challenged, in which case you will have to argue, and perhaps prove, that you provided more than half of the childs total support.)

CAVEAT and CAUTION: The foregoing discussion presumes that there is no court order in your particular case that specifically addresses and determines the tax exemption question. If there is, you are advised to check with a lawyer to determine the validity/enforceability of the provision.

###

LAWRENCE D. GORIN
Law Offices of L.D. Gorin
621 S.W. Morrison St., Suite 350
Portland, Oregon 97205
Phone: 503-224-8884 (afternoons, Pacific time)
Fax: 503-274-0818
E-mail: [email protected]

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