Tax Issues in Divorce Mediation

The IRS states that the parent who can claim the dependency exemption for a child on his or her tax return is the parent designated as the custodial parent by a court order or a legal agreement. Absent either, the custodial parent is defined as the parent with whom the child resides the greater number of nights during the year. Some couples alternate the tax benefit from year to year to share the savings.

In mediation I also suggest to the parties that they look at which party benefits most from the benefit. For example, if one parent is in a higher bracket and the other parent is not, it makes economic sense for the higher wage earner to receive the exemption. The parent in the lower bracket would be compensated by the other parent by his/her paying that parent’s tax cost. In this manner, both parties come out ahead. However, for this to work, both parents will need to cooperate in the future since this scheme requires both parents to share income and tax information with each other every year. Clearly, some parents are not willing to do that. And that is fine. The mediator’s job is to point out that the decision can save thousands of dollars every year which would be better spent on the children as opposed to the government. Again, a mediator can only recommend. In mediation the parties are the decisionmakers.

If the custodial parent does so agree in order to release the exemption to the noncustodial parent, the custodial parent must execute IRS Form 8332 which the noncustodial parent then files with his or her tax return.