Alternating the Exemption
A common method parents use to “split” a dependent exemption is to alternate it from year to year. If you have only one child, you can claim her this year, and your ex can claim her next year. However, if one of you has significantly less income than the other, this doesn’t always make sense. The exemption usually offers the most benefit to the parent who earns more. For example, if your ex’s income is on the cusp between a 28 percent tax bracket and a 25 percent tax bracket, the deduction might drop him to the lower bracket and save him considerable money. The exemption could mean more to him than the $3,800 exemption amount as of 2012; it could save him from paying additional taxes as well. If you earn less, or if the exemption won’t affect your tax bracket, you might be better off letting him take the exemption yearly and negotiating for another marital asset instead, one that would do you more good.
Splitting the Exemptions
If you and your ex have more than one child, dealing with the exemptions becomes easier. Many parents each take a child every year. For example, if you have two children, you can each claim an exemption for one on every tax return. However, if you have an odd number of children, you’ll have to negotiate who gets to claim the "extra" child. You can alternate that child yearly, as you would if you had only one child.
However you negotiate your exemptions, the IRS wants to know about it. You can’t just reach a decision and file your returns accordingly unless it’s in line with IRS rules. The IRS automatically gives the exemption for each child to the custodial parent. Therefore, if you’re the custodial parent and you’re not going to claim the exemption, you must complete and sign IRS Form 8332, and your ex must attach it to his return. This is a “Release of Claim to Exemption for Child by Custodial Parent.” You generally don’t need this form when the custodial parent claims the exemption.
IRS Tiebreaker Rules
When you reach a decision, it’s important that both parents abide by it. If you both claim the same child in the same tax year, the IRS will probably audit both of you. The IRS will apply tiebreaker rules to determine which of you receives the exemption you both claimed. If your divorce decree contains a specific reference to who gets the exemption, this will break the tie. Otherwise, the IRS will give the exemption to the parent with whom your child lived for more than six months of the year. If your child lived with each of you for six months, the parent who earned more receives the exemption. The “losing” parent may have to pay penalties and interest.