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I hope this doesn't get confusing. I'm going to interject as we go along, primarily because this is the first time I've really looked at the "uniform" (they aren't) rules for determining whether someone is a qualifying child. Hopefully Peter, Ira and others will be along to confirm or set me straight. I'm working from this IRS fact sheet on the qualifying child:,,id=133298,00.html

You wrote:

Someone from NH who is a friend of a friend called me last week for tax advice about her upcoming divorce. Client is 34. She has custody of two children, a girl 14 and boy 7. She is biological mother to both. She will earn approximately $9,000 - $9,500 in 2005. She and soon to be ex have lived apart since April 2005. She has rented since May 2005 and has paid more than 50% support for her children for the year.

The lived apart part is important, the support irrelevant. For HofH status to apply to a legally married person, that person must live apart from the spouse from July through December. (There are other requirements.) There is no support test for children of divorced or separated parents. The parent with more than 50% custody gets the dependency exemption regardless of what money changed hands.

The divorce is not finalized but they are working out financial details. Based upon her income she will not qualify for Child tax credit or additional child tax credit, just EIC. If divorce is finalized by Dec. 31, 2005 she would file as single. However if not final she needs to be eligible to file HOH in order to qualify for EIC.

The part about filing Single is wrong. When an unmarried person provides more than half the cost of maintaining a household which includes a qualifying person, (s)he is entitled to file as Unmarried Head of Household, a better filing status than Single. I assume what you're saying in the last sentence is that if she doesn't qualify to file HofH, she'll be stuck with Married, filing separately, which isn't eligible for EIC.

By my understanding of new "qualifying child" rules she can give up exemption for one child and still claim that child for EIC because she fits the exception being the custodial parent.

AFIAK nothing has changed about whether a qualifying child for EIC has to be a dependent--there is no such requirement. It's strictly a residency requirement. If the child lived with you more than 6 months of the year, it's a qualifying child for EIC regardless of dependency. Thus, she could give up both dependency exemptions and still claim the EIC.

However if she gave up exemptions for both children she would not be able to file HOH as she had no dependants. Without HOH she would be filing MFS and then no EIC.

I don't read the rules this way. I looked at the new Pub 501 (footnote 2 of Table 4 on page 8), and it appears to say exactly the opposite. IOW, if she could take a dependency exemption but cedes it to the father, the child remains a qualifying person for HofH.

Therefore not being sure when divorce will become final, the safest option is to allow husband to claim exemption for one child. Husband is the biological father of the 7 year old and legally adopted the 14 year old.

There is no distinction between birth and adopted children.

Then Mom can file as HOH and claim EIC for both of her children.

As I said before, it looks to me like she can give him both dependency exemptions and still file HofH and use them as qualifying children for the EIC.

He has been paying her $189 per week in child support since April. For purposes of maintaining the home who gets to claim that money.

He's not in the picture, except for writing checks. She includes a portion of that in money provided by "others" to maintain the household. Note that the expenses that go into maintaining the household are only a subset of the expenses of supporting the child. For example, clothing and entertainment are support expenses, but they're not part of maintaining the household.

There are worksheets in Pub 501 that would help with this calculation if it seems necessary. I would first apply the child support to support items that are not costs of maintaining the household, with the balance considered paid to such maintenance.

Does my scenario of claiming exemption for one child and passing the other to ex seem the best option here? I assume she will get more money from him if she gives him the exemption.

I hope we're talking about a property settlement here rather than child support. I know very little about family law, but from what I glean from Judge Judy, this is usually based on formulas.

Here's how this would work in my ideal world. The parents, realizing that they are entwined in each others lives for the duration because of the children, and for the sake of the children, who are already experiencing trauma, will be amiable, reasonable adults. The divorce decree wouldn't address any of this, other than child support (if that's where it gets addressed in that jurisdiction). The parents would then sit down each January, run the numbers, and see what allocation of the dependents makes the most sense. They're free to do that under the tax law, and as long as they keep their heads about them, they can work this to the maximum benefit of all four.

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