IRS Reverses Course on Special Rules Applicable to Determination of Dependent Status in Cases of Divorce and Separation
August 25, 2008
On August 5, 2008, we issued a Client Alert describing final regulations issued by the IRS in late July addressing the special rule applicable under Section 152(e) of the Internal Revenue Code (the “Code”). Under the special rule, a non-custodial parent of a child may treat the child as a dependent if certain requirements are met. In addition, if the special rule applies, both parents may treat the child as a dependent for certain purposes, such as group health plan coverage and health savings account (“HSA”) distributions.
Our Client Alert highlighted an important clarification contained in the final regulations regarding application of the special rule to group health plans and HSAs. According to the regulations, for both parents to treat the child as a dependent for purposes of group health plan coverage HSA distributions, the custodial parent had to release the right to claim the child as a dependent. This rule created an unusual situation in which the custodial parent would release the right to claim the child as a dependent, but (despite the release) could continue to treat the child as a dependent for purposes of group health plan coverage and HSA distributions.
The IRS apparently, upon further reflection, determined this unusual outcome was unnecessary. On Monday, August 18, 2008, the IRS released Revenue Procedure 2008-48, which reverses the clarification contained in the final regulations. As provided in the Revenue Procedure, for purposes of group health plan coverage and health savings account (HSA) distributions, both parents can claim the child as a dependent if:
- the child qualifies as a dependent of one of the parents;
- the parents (both parents together) provide more than ½ of the child’s support for the calendar year;
- the child is in the custody of one or both parents for more than ½ of the calendar year; and
- the parents are divorced, legally separated under a decree of separate maintenance, separated under a written separation agreement, or live apart at all times during the last six (6) months of the calendar year.
Note: There is no longer a requirement that the custodial parent release the right to claim the child as a dependent.
In light of this change in the rules, we have again updated our standard Certification of Dependent Status form, which is available on our website.
Please let us know if you have any questions regarding the Revenue Procedure.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.