You have prepared tax returns for Christine and Henry Chang for several years. T
ID: 2568059 • Letter: Y
Question
You have prepared tax returns for Christine and Henry Chang for several years. This year, they emailed you, stating that they have finalized their divorce but they “remained friendly” and want you to prepare each of their individual tax returns. They did insist, however, that each of their financial affairs be kept confidential from the other.
When Christine brought in her tax records, she listed all three of her children as dependents and provided information which shows that they attended school in her neighborhood, which is about 40 miles from where Henry lives. Christine’s oldest son John is 17 years old. Christine provided you with a photocopy of his driver’s license which shows his address as being Christine’s residence. Accordingly, you filed Christine’s tax return, claiming all three children as her dependents.
When Henry brought in his tax records, he also listed all three children as his dependents. He brought in a copy of their divorce decree. In a signed document incorporated into this decree, Christine expressly waived her right to claim their children as dependents on her tax return, in exchange for her receiving increased alimony.
Based on your online research, the custodial parent who has physical custody of the children a majority of the time generally is entitled to claim children as dependents unless the right to this dependency exemption has been transferred in writing to the noncustodial parent.
a. When you prepare Henry’s tax return, may he claim the three children as dependents on his individual tax return?
b. What, if anything, should you tell Christine?
c. What, if anything, should you tell the IRS?
Explanation / Answer
Based on the above given facts, the answer for the given question is;
a. Yes, Henry can claim the three children as dependent on his individual tax return for as per the Divorce decree which they have finalised, in which Christine expressly waived her right to claim their children as dependent in order to receive increased alimony. Moreover, she have neither transferred right to dependency exemption in writing to noncustodial parent i.e. Henry to claim children as dependent when majority of the time children were with her.
b. Christine should be told to revise her return and withdraw the dependency of the children from her individual tax return which was shown when tax return was filled. Further, she should be advised that in order to claim the children as dependent she should transfer in writing right of dependency exemption to the noncustodial parent i.e. Henry.
c. IRS should be told that as per the Divorce Decree Henry has the actual right of the dependent childrens as Christine has expressely waived off her right to claim children for increased alimony. So Henry's individual tax return in which he claims the three children as dependent should not be rejected.
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