When the parents of a child are divorced or separated, the question arises as to who can claim the child as a dependent. While it is mostly the parent who has been granted custody of the child, it is possible to transfer the right to claim the child for tax benefits such as the Child Tax Credit to the noncustodial parent. This transfer is done through Form 8332. In this guide, we will look into the details of this form and the process involved in this transfer.
What Is Form 8332?
IRS Form 8332 is a form used by one parent, often the custodial parent, to transfer the child’s dependency exemption to the other parent. It is an important form that can determine the taxation benefits for a parent.
Purpose of Form 8332
The main purpose of Form 8332 is to allow one parent to release their claim to the right to claim the child for tax benefits such as the Child Tax Credit, so the other parent can claim it instead. This is a legal way to make this transfer and prevents disputes over who gets the exemption. Without this form, the IRS automatically grants the rights to the parent with whom the child has spent the most time in a year, which legally is the definition of a custodial parent.
Who Needs to File Form 8332?
Form 8332 must be filled out and signed by the parent who is currently claiming the child’s dependent exemption. When this is filed with the IRS, it is an indication that this parent is releasing the exemption, so the other parent can claim it as a part of his or her tax return. It also lets the IRS know of this decision.
Key Situations for Using Form 8332
Form 8332 is mostly used in the following situations:
- When two parents are legally separated, and one parent is willing to transfer the exemption to the other.
- When two parents currently have informal custody arrangements and want to formalize them.
- To resolve disagreements between parents regarding the sharing of expenses and who is entitled to claim the child for tax benefits.
When Should You Use Form 8332?
Form 8332 is used to release a claim, revoke a previously-released claim, or make changes to the terms of the claim. Any of these changes is notified to the IRS through Form 8332.
Releasing a Claim to Exemption
A custodial parent can release the right to claim the child for tax benefits to the other parent for a specific tax year or even for multiple years. This allows the other parent to claim tax benefits such as the Child Tax Credit.
Revoking a Previous Release
Sometimes, circumstances and custodial arrangements change among parents due to factors like marriage, job relocation, and more. To accommodate such changes, one parent may want to revoke a claim given earlier to the other parent. This revocation can be done by filing Part III of Form 8332 along with a letter notifying the other parent of this change. The revocation becomes valid in the year following the year in which the form was filed.
Timing Considerations
A key aspect of Form 8332 is the timing of filing. To be valid for the current tax year, Form 8332 must be completed and signed by the custodial parent before the noncustodial parent files their tax return for that year. The release is only valid if the noncustodial parent attaches the signed Form 8332 to their return. If the release applies to multiple years, it remains valid for those years until it is formally revoked by the custodial parent.
How to Complete Form 8332
The custodial parent must use due diligence to complete Form 8332. It’s best to understand the different provisions and furnish the correct number to avoid rejections and delays in processing from the IRS. At the top of the form, you must fill out the name of the noncustodial parent and his or her Social Security Number.
Part I – Release of Claim for Current Year
If you’re the custodial parent and want to release the right to claim the child for tax benefits for the current year, fill out Part 1 of Form 8332. It is a simple form, where you mention the full name of the child and the year for which you are releasing the exemption claim. Once you complete the form, sign it, and enter the date and your Social Security Number.
Part II – Release of Claim for Future Years
As a custodial parent, if you want to release the claim for future years, you must fill out Part II of the form. It is similar to Part I, except that you will have to specify the years for which you want to release the claim. Every applicable tax year must be clearly stated in this form and the IRS will grant an exemption to the other parent only for those specified years.
Part III – Revocation of Release
If you had released your claim to exemption earlier and want to revoke this release, use Part III of the form. Note that once you submit the form, the revocation will be applied for subsequent years only and not for the current year in which it was submitted. Also, it is the responsibility of the person filing the revocation to inform the other parent of this revocation, including providing a copy of the form.
Make sure to keep a copy of the form and attach it to your tax return each year when you claim the exemption.
Filing Requirements and Attachments
Form 8332 must be attached to Form 1040 by the noncustodial parent who is claiming the child for tax benefits. If filing electronically, a scanned copy of Form 8332 must be uploaded. The custodial parent is not required to attach the form unless they are revoking a previously granted release (Part III). Both parents should retain a copy of the completed and signed form in case of an IRS audit.
Tax Benefits Affected by Form 8332
Form 8332 determines which parent can claim the Child Tax Credit. Note that the deduction for personal exemptions is suspended from 2018 to 2025 by the Tax Cuts and Jobs Act. Due to this change, the exemption amount is zero. Still, it can make a parent eligible for other tax benefits, like the Child Tax Credit.
Benefits Transferred to Noncustodial Parent
By default, the custodial parent has the right to claim a child’s dependent exemption because the child spends a large part of the time with this parent, and hence, this parent incurs expenses related to raising the child. That said, Form 8332 enables the custodial parent to pass on this claim for exemption to the noncustodial parent. This enables the other parent to claim the Child Tax Credit and the Credit for Other Dependents, where applicable.
Benefits Retained by Custodial Parent
Even after signing Form 8332 and releasing the claim to exemption, the custodial parent still retains certain benefits. They are:
- Head of Household (HoH) filing status: This status is available to those who are unmarried and offer a home for a dependent child for more than half of the days in a year. Despite releasing the claim, the custodial parent can have a higher standard deduction and lower tax rate than filing single.
- Earned Income Tax Credit (EITC): This is a tax break available for low to moderate-income workers. You can claim this credit if you meet the income and residency requirements, and this cannot be transferred through Form 8332.
- Child and Dependent Care Credit: This is a non-refundable tax credit that is available for those who pay to care for a dependent, so they can work or look for work. In other words, this tax credit is available when you pay for childcare expenses.
- Exclusion for dependent care benefits: If the custodial parent receives dependent care assistance from the employer based on the terms of employment, this individual can exclude a certain amount, up to the predetermined limit, from taxable income.
All the above benefits are available only for the custodial parent, even after the release of the dependent exemption to the noncustodial parent.
Limitations on Tax Credits
There are limitations on tax credits available for noncustodial parents. For example, these parents cannot claim EITC or the Head of Household filing status. The IRS automatically rejects such claims because they are tied directly to the physical custody of a child, and not the legal forms or financial contributions.
How Manay CPA Can Help with Form 8332?
Form 8332 is critical as it directly impacts the tax burden of a parent. Moreover, the IRS scrutinizes this form to ensure that neither parents don’t claim the Child Tax Credit. Also, the sensitive nature of the relationship can cause friction while filling this form. To avoid these negative consequences, you should take the help of an experienced tax service firm like Manay CPA.
Ensuring Proper Filing with the IRS to Avoid Errors
Manay CPA’s team of experts understands your scenario and provides the best guidance to fill out Form 8332 without any errors. They also provide guidance on how to file this form along with your income tax returns. All these efforts can reduce the chances of IRS tax audits and the possibility of the IRS rejecting claims and returns.
Maximizing Tax Benefits While Complying with Rules
As mentioned earlier, the custodial parent can get many tax benefits even after releasing the dependent exemption. However, this requires inputs from experts like Manay CPA, who are well-versed in tax provisions and can help maximize tax benefits while complying with the rules.
Schedule a Free Consultation
Whether you are a custodial or a noncustodial parent, Form 8332 can bring multiple benefits, provided it is filled out and submitted before the specified deadline. For clear guidance, support, and handling the documentation, schedule a free consultation with Manay CPA today.
FAQ Section
Is Form 8332 Required Every Year?
Not always. If a custodial parent provides an exemption for multiple years in the same form, then Form 8332 is not required every year. On the other hand, if the custodial parent prefers to provide a release for one year at a time, then the form is required every year.
Can a Noncustodial Parent Claim Head of Household with Form 8332?
No, a noncustodial parent cannot claim the Head of Household (HOH) filing status with Form 8332. This status is available only for the custodial parent, with whom the child spends more than half of the year.
Does the IRS Know Who the Custodial Parent Is?
Yes, the IRS uses the tax information from both parents and the past child tax credit claims to determine which is the custodial parent of a child. It also uses the child’s reported residence to determine the custodial parent and provides tax credits only for this parent.
How to Stop Noncustodial Parents from Claiming Their Child on Taxes?
The custodial parent must file the return at the earliest, so the other parent cannot claim their child on taxes. It also helps to inform the IRS directly if the noncustodial parent files a claim. The custodial parent must also maintain documents related to the custody of the child, expenses incurred, and even school records to prove their claim.
Can a Noncustodial Parent Claim EITC?
No, the EITC is available for the custodial parent only. Form 8332 cannot transfer this right to the noncustodial parent. However, EITC is subject to income and residency requirements that the custodial parent must fulfill to claim this deduction.
How Do Divorce Decrees Affect Form 8332?
Divorce decrees generally do not have a major impact on Form 8332. By default, the custodial parent is entitled to claim the child for tax benefits such as the Child Tax Credit. Only when Form 8332 is signed and filed does this right transfer to the noncustodial parent. Until then, the right to claim the child remains with the custodial parent. However, if the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may attach certain pages from the decree or agreement instead of Form 8332, provided that these pages are substantially similar to Form 8332.
What to Do If the Custodial Parent Changes Their Mind?
The custodial parent can revoke the exemption release at any time by filling out and signing Part III of Form 8332. However, the tax effect will happen only from the following year and not for this tax year. This provision enables the custodial parent to determine when the noncustodial parent can claim exemptions.
