The Internal Revenue Service (“IRS”) has recently provided new guidance that
will allow a child of parents who are divorced, separated or living apart to be
treated as the dependent of both parents.
In general, the IRS does not allow non-custodial parents to claim children as
dependents for purposes of the dependency tax exemption. Under Internal Revenue
Code Section 152(e), a child of divorced or separated parents will only be
treated as a dependent of a non-custodial parent for tax exemption purposes if
the custodial parent provides a written declaration that he or she will not
claim the child as a dependent for the tax year. Additionally, the non-custodial
parent must attach a copy of this declaration to his or her tax return.
However, in Revenue Procedure 2008-48 released in August 2008, the IRS
indicated that it will treat a child as a dependent of both parents under
certain circumstances that are generally related to medical expenses, medical
coverage and certain other employee benefits, irrespective of whether or not the
child’s custodial parent has provided the written declaration described above.
Covered Benefits / Income
More specifically, under Revenue Procedure 2008-48, the IRS will treat a
child as a dependent of both parents, absent a declaration of the custodial
parent, for the following federal income tax purposes:
Exclusions from gross income for employees for certain employer-provided
medical reimbursements, including expenses incurred by employees for medical
care of a spouse and dependent children (Code Section 105(b));
- Exclusions from gross income for contributions made on behalf of
employees, their spouses and dependent children to an accident or health
plan (Code Section 106(a));
- Exclusions from gross income for “no-additional cost services” that an
employer provides to employees, their spouses and dependent children as
fringe benefits or qualified employee discounts (Code Sections 132(a) and
- Deductions for medical expenses, including medical expenses of a
taxpayer’s spouse or dependent children (Code Section 213(a)); and
- Exclusions from gross income for distributions from Archer Medical
Savings Accounts and Health Savings Accounts that are used to pay for
qualified medical expenses of the beneficiary, the beneficiary’s spouse and
dependent children (Code Sections 220(f)(1) and 223(f)(1)).
In addition, Revenue Procedure 2008-48 applies and is limited to taxpayers
- Are divorced, legally separated under a decree of divorce or separate
maintenance, legally separated under a written separation agreement or live
apart at all times for the previous six months of the calendar year; and
- Are the parents of a child who:
- Receives over one-half of the child’s support during the calendar
year from the child’s parents;
- Is in the custody of one or both parents for more than one-half of
the calendar year; and
- Qualifies under Code Section 152(c) or 152(d) as a qualifying child
or qualifying relative of the child’s parents.
The guidance in Revenue Procedure 2008-48 is effective as of August 18, 2008.
However, taxpayers may apply the guidance to any tax year beginning after
December 31, 2004 and receive a credit or refund under Code Section 6511.
As a result of this guidance:
- Employers will be able to provide coverage to non-custodial children
without requiring a written declaration from the custodial parent allowing
the coverage. This should reduce the paperwork requirement and ease the
administration of health and welfare benefit plans.
- Non-custodial parents will be able to exclude from their income any
reimbursements or the cost of the employer providing coverage.
- Employers should inform employees that children may participate in
employer-provided “no additional cost services” regardless of whether
employees have custody of their children.
- Finally, employees may take distributions from their Archer Medical
Savings Accounts and Health Savings Accounts to pay for the qualified
medical expenses of their non-custodial children without including these
distributions in their gross income.
For further information or help analyzing the impact of this new IRS guidance
on your employee plans and pay procedures, please contact any member of the
Employee Benefits or Labor &