The new federal income-tax rebates may trigger some sticky problems for
parents who have one or more children from a previous marriage, as the
following question from a woman in Cranston shows:
Q: I'm wondering if [you] could discuss the complexities that
result regarding the . . . $400 credit that's being talked about in
[the] paper: When ex-spouses share custody -- where one spouse has the
child as a dependent one year, and the other spouse has him the next
year -- how would that be resolved or handled by the Internal Revenue
Service?
-- S.P., Cranston
A: Of all the questions MoneyLine has received so far about the
$400 rebate checks the Treasury plans to start mailing next month, yours
is among the thorniest.
Who'll get the check? Maybe the parent who isn't entitled to it. First,
some background:
Under the new tax law, the federal child tax credit is now $1,000, up
from $600. Instead of making you wait to claim that $400 difference on
your tax return early next year, President Bush and Congress want to get
it to you now, in the form of a check.
For convenience, I call it a rebate. But it's really a payment the
Treasury is making in advance of your filing a tax return for the 2003
tax year. That's an important point to keep in mind.
Although the $400 check relates to the 2003 tax year, the U.S. Treasury
will rely on the information on 2002 tax returns to help figure out who
should get a rebate.
And there's the rub.
Suppose you have a child from a previous marriage. You arrange things so
that you claim the child as a dependent on your tax return one year (and
claim the child tax credit for that year, too), and your ex-spouse does
it the next.
Here's where it gets tricky. If your ex-spouse claimed the child on his
or her 2002 return, you should get the rebate this year, because the
rebate check relates to the 2003 tax year.
But when the Treasury and its bureau, the IRS, look at the returns for
2002, they'll find that your ex-spouse claimed the child for that year.
As a result, as things now stand, the Treasury will mail the $400 check
to your ex-spouse -- even though the money should go to you.
When I asked IRS spokeswoman Peggy Riley what the agency plans to do
about this dilemma, she didn't have an answer; she said she'd have to
check it out.
But she said that, as of now, the Treasury plans to send the check to
whichever parent was listed on the 2002 return on which the child was
claimed as a dependent (and on which the child tax credit was claimed,
too).
This is going to cause problems for a lot of people, said Joseph P.
Matoney in an interview at the University of Rhode Island in Kingston,
where he is professor of accounting.
In general, the child can be claimed as a dependent for tax purposes by
only one of the parents each year, not by both, said Matoney, who also
runs his own tax-consulting practice.
In general, if you don't indicate on your tax return that the child
lives with you -- in other words, if you're the "noncustodial parent" --
you need to get a special IRS form that allows you to claim the child as
a dependent on your return, and get the child tax credit, too. The form
isn't valid unless the custodial parent signs it. (For more on this
form, see "Today's Tip" below.)
It's "very common" for parents who have a child from a previous marriage
to take turns claiming the child as a dependent for tax purposes, he
said.
"I have a lot of clients who take turns" claiming a child on the annual
tax return, he said.
If the IRS doesn't somehow resolve the issue involving the mailing of
rebates, what will happen? "The [rebate] could go to the wrong person,"
Matoney said.
Bob D. Scharin, a lawyer and editor of "Practical Tax Strategies," a
monthly journal for tax professionals published by RIA of New York,
offered one possible solution:
"If she gets to claim [the child tax credit] for 2003, but he gets the
$400 by accident, then he'll have to pay it back."
Scharin's advice for the parent who gets the check by accident: "Don't
spend it unless you're entitled to it."
But that may be easier said than done. Some parents may be able to
resolve the situation amicably; others may not.
TODAY'S TIP: In general, for each year in which a noncustodial
parent claims a child as an exemption for federal tax purposes, that
parent must attach to his or her tax return a copy of IRS Form 8332,
"Release of Claim to Exemption for Child of Divorced or Separated
Parents."
For the form to be valid, you need the signature of the custodial
parent. (The custodial parent may use this as leverage to ensure that
child-support payments stay current, Matoney said. Indeed, the form
itself advises the custodial parent that, "To help ensure future
support, you may not want to release your claim to the child's exemption
for future years.")
There are lots of other rules and details about taxes and divorced or
separated parents, too many to list here. For more information, see IRS
Publication 504, "Divorced or Separated Individuals."
For a copy of the form or the publication, visit your local IRS office,
call the agency toll-free at (800) 829-3676, or see the IRS Web site:
www.irs.gov
Neil Downing is a Journal staff writer and author of The New IRAs and
How to Make Them Work for You. Questions about your money matters? Call
us at 1-401-277-7484 or 1-888-697-7656 (ask for ext. 7484) and leave a
message. Sorry, no personal replies; as many questions and issues as
possible will appear in this column.
