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Tax Dependency Status Caselaw Update, February 2023
Who Can Claim a Child on Taxes Has Changed
The Court of Appeals of Kentucky entered a new ruling in February 2023 addressing tax dependency status. The Court’s ruling in Bankston v. Mattingly, 661 S.W.3d 755 (Ky. Ct. App. 2023) modified how tax dependency status has been allocated for the last several years between equal timesharing parents.
Family Courts in Kentucky have been acting under Adams-Smyrichinsky v. Smyrichinsky, 467 S.W.3d 767, 781 (Ky. 2015) and in equal timesharing situations alternating years between parents for claiming a child for tax purposes.
The Role of Federal Law
The Kentucky Supreme Court stated in Adams-Smyrichinsky v. Smyrichinsky, that who is entitled to claim a child for exemption is primarily a matter of Federal law.
Federal law states:
“A taxpayer may claim a dependency deduction for a child ... only if the child is the qualifying child of the taxpayer[.]” 26 C.F.R.3 § 1.152-4(a). To be a qualifying child of the taxpayer, the child must have “the same principal place of abode as the taxpayer for more than one-half of such taxable year.” 26 U.S.C. § 152(c)(1)(B). “A child is in the custody of one or both parents for more than one-half of the calendar year if one or both parents have the right under state law to physical custody of the child for more than one-half of the calendar year.” 26 C.F.R. § 1.152-4(c).
Equal Timesharing is the Presumption in Kentucky
Now that equal timesharing is the presumption in Kentucky, many more families are operating under an equal timesharing schedule. And per Federal law both parents have an equal right then to claim a child for tax purposes if exercising equal timesharing. What the family courts have done since the ruling in 2015 is alternate which parent can claim the child each year.
The Court of Appeals modified that in Bankston v. Mattingly, and stated that:
“In cases where the parties have roughly equal timesharing, the IRS rule dictates that the deduction belongs to the party with the higher adjusted gross income.”
The purpose being that tax dependency exemption should be allocated in a manner to maximize the greatest financial benefit to the child(ren).
What does this mean?
In equal timesharing situations, where one parent earns significantly more than the other, the higher-earning parent should be entitled to claim the child every year for tax purposes, rather than alternate.
