We all know that there is a dependency exemption available for children who live with us.  But in a divorce situation, who gets to take the deduction?

Pursuant to the Internal Revenue Code Section 152, if one party has primary physical custody of the child(ren), such that the child lives with that parent for more than one-half of the year, that party is entitled to claim the exemption. 

Pennsylvania Rule of Civil Procedure 1910.16-2(f) authorizes the court to award the dependency exemption to the non-custodial party as "justice and fairness require", in an effort to maximize the total available income for support.  The Rule also permits the court to decide which party gets the exemption in a situation where custody is equally shared.

However, most recently the IRS has issued Notice 2006-86, which is entitled "’Tie-braking’ Rule for Two or More Taxpayers Claiming a Child as a Qualifying Child".  The Notice provides information regarding IRC Section 152(c)(4)(B), which states, in substance, that where the parents share custody equally, such that the exemption could be claimed by either party, "the taxpayer with the highest adjusted gross income for that taxable year" gets to claim the exemption. 

This new rule answers a question which used to create problems on April 15 of each year for divorced parties and their lawyers.  Now, whether you agree with it or not, there is a rule on the issue.