Divorcing clients who live apart can have many questions about tax deductions for spousal support (and eventually alimony) and the ability to take tax exemptions for their child(ren). Usually the parent with whom the child(ren) reside for more than 50% of the year can take the exemptions. However, this may not make sense, as in the case of an unemployed parent with a high wage-earning spouse. The higher wage earner may want to use the exemptions and then agree to share any refund that he/she receives. When the higher wage earning parent with less than 50% custody uses the exemptions, the custodial parent must complete Form 8332 giving the other parent the right to use the exemptions. I advise all clients to speak directly with their CPA to learn the latest tax rules and the most advantageous filing status based on their particular situation. I am not a CPA and do not give tax advice.
What is really bad news is when the parties "race to the IRS" and both of them claim the child(ren) as exemptions. This is a big 'ol red flag to the IRS and most likely will trigger an audit. The whole situation could be avoided if the parties work out the exemption issue beforehand; if the higher wage earning/non custodial parent is using the exemptions to pay a smaller amount in taxes or receive a larger refund, he or she may want to consider offering a portion of the refund to the other parent or pay a higher amount in support to offset the benefits received. Please communicate with your lawyer before April 15, when it's too late!