Updated for Tax Year 2014
Having custody of your child usually means you can claim an exemption for that child as a dependent on your taxes. But if you don't have to file a tax return, or you reach an agreement with your child's noncustodial parent, you can let them take the exemption instead with Form 8332.
Custodial parent releases claim on Form 8332
For tax filing purposes, having custody is not necessarily the same as it is for a divorce decree. While a divorce decree can state that one parent has custody of a child, the requirement for the IRS generally depends on which parent the child lived with for the greater number of nights.
If you have custody of your child, but want to release the right to claim your child's exemption to the noncustodial parent you’ll need to fill out Form 8332. All that’s needed is your child's name, the tax year, your Social Security number, then your signature and date. If you prefer to release your claim to your child's exemption for more than one tax year, enter the same information in part two rather than part one. Once complete, give the form to your child's noncustodial parent, not the IRS. They will file it with their tax return. If you release your claim for multiple tax years, you only need to fill out the form once: the other parent will attach copies of the original to their return each year.
Noncustodial parent must be eligible
The child's noncustodial parent must be eligible to claim the child as a dependent to take the exemption. The rules for claiming
a dependent usually require the parent to live with the child for more than half the year. This rule can be waived when the parents are divorced, separated or live apart from each other. For this waiver to apply, more than half of the money needed to support your child must come from you and the noncustodial parent. In addition, your child must not live with anyone other than you and the noncustodial parent for more than six months of the year. Therefore, if your child's noncustodial parent isn't eligible, giving them a completed Form 8332 doesn't change the fact that they can't claim the child.
What you give up with Form 8332
Giving the completed Form 8332 to the noncustodial parent gives up more than just an exemption. For example, additional child tax credits are only available to the person who claims the child as a dependent. It also prevents you from filing as head of household, which includes a higher standard deduction and lower tax rates on your income.
Taking your child's exemption back
As the custodial parent, if you decide to start claiming the exemption again after you’ve released it to the noncustodial parent, you can do so by completing part three of Form 8332. You can do this for the specific tax years you list, or write “all future years.” Reclaiming the exemption isn't effective until the tax year after the calendar year in which you provide your child's noncustodial parent with Form 8332. In other words, if you provide the form in 2015, the earliest you can reclaim the exemption is on your 2016 tax return which you will file in 2017.