The IRS has issued some new proposed regulations on the qualifying child issue. Specifically, on not currently married parents claiming their children. (Reg 149856-03).
A few years ago, Congress attempted to standardize the definition of child in order to qualify for exemptions and credits. Of course, this left many issues hanging and none so basic as "custody" and divorced/ never married parental issues. Generally, the issue of custody is thought to be handled in the divorce, but too often both parents attempt to claim the same child. That puts the IRS in the middle of a family fight.
For tax purposes, the IRS has "simplified" the criteria for "custodial parent".
Under the proposed regulations, the custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year. The noncustodial parent is the parent who is not the custodial parent. The proposed regulations further provide that, if a child is temporarily absent from a parent's home for a night, the child is treated as residing with the parent with whom the child would have resided for the night.
That means that the custodial parent has the right to claim not only the exemption/child tax credit but could use the child to qualify for EIC, Child Care Credit and Head of Household. The custodial parent can always release the exemption (and only the exemption and the child tax credit that goes with it) to the non-custodial parent with a signed Form 8332 or a written document with all the same info. (No longer does the divorce decree alone grant the non-custodial parent the right to claim the exemption.)
Sections 151 and 152, not state law, determine whether a divorced or separated parent may claim an exemption for a child for Federal income tax purposes. A state court order or decree does not operate to allocate the federal exemption between parents.
The proposed regulations also explain the procedure for revoking the release of exemption.
The bottom line is if there is a question about claiming a child for an exemption and/or HH/EIC, the IRS wants to make the custody determination of where the child spends there nights. Once custody is decided, the question is whether an exemption release meets all of the IRS's criteria.