IRS Procedure Changes Tax Treatment of Dependents

Generally speaking, the IRS does not allow the non-custodial or parent with the least number of parenting time (in Montana divorce terms) to claim the children as dependents for the purposes of the dependency tax exemption. If a non-custodial parent plans to claim a child, Internal Revenue Section 152(e) requires the custodial or parent with the greatest number of days of parenting time to provide a written declaration that he or she will not claim the child as a dependent for a given tax year. The non-custodial must provide a copy of the declaration to their tax return. For those in Montana, attaching a copy of the Parenting Plan that deals with claiming the tax exemption may suffice.

In August 2008, the IRS released a new procedure that will treat a child as a dependent of BOTH parents under certain circumstances, particularly those relating to medical expenses, medical insurance and certain employee benefits. Internal Revenue Procedure 2008-48 allows a parent to claim a child as a dependent (with the declaration from the other parent) for the following purposes:

• Exclusions from gross income for employees for certain employer-provided medical reimbursements, including expenses incurred by employees for medical care of a spouse and dependent children (Code Section 105(b));
• Exclusions from gross income for contributions made on behalf of employees, their spouses and dependent children to an accident or health plan (Code Section 106(a));
• Exclusions from gross income for “no-additional cost services” that an employer provides to employees, their spouses and dependent children as fringe benefits or qualified employee discounts (Code Sections 132(a) and 132(h)(2));
• Deductions for medical expenses, including medical expenses of a taxpayer’s spouse or dependent children (Code Section 213(a)); and
• Exclusions from gross income for distributions from Archer Medical Savings Accounts and Health Savings Accounts that are used to pay for qualified medical expenses of the beneficiary, the beneficiary’s spouse and dependent children (Code Sections 220(f)(1) and 223(f)(1)).

For more information, speak to a tax your tax professional.