In a divorce or separation, dependency exemptions go to the custodial parent specified in the divorce or separation agreement, regardless of physical custody. Without such an agreement, the parent with physical custody for most of the year gets the tax break. However, a custodial parent with income too low to claim the dependency exemption can sign over the exemptions to the higher-income parent using IRS Form 8332. These exemptions may result in greater tax savings for the higher-income parent.
Specific Details
For those in the 30% bracket, each $4,000 exemption saves $1,200 in federal income tax. For those in the 15% bracket, each $4,000 exemption saves $600. In return for signing Form 8332, the custodial spouse should receive concessions in the separation or divorce negotiations.
Potential Savings
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by signing over the dependency exemptions to a higher-income ex-spouse.