Los Angeles, CA– Some good tax news for dads from Mike McCormick, Executive Director of the American Coalition for Fathers and Children. Mike writes:
The IRS has issued a new revenue procedure ruling allowing non-custodial and non-primary (aren’t these terms offensive, I’m not a non-anything to my kids) residential parents to count children not living with them as dependents for purposes of providing benefits through HSA and MSA accounts.
In a recent article from the publication Tax Notes Today called “IRS Broadens Definition of Dependent to Ease Use of Medical Savings Accounts,” reporter Amy Elliot explains:
In a move praised by many practitioners, the IRS has taken a step toward expanding the number of taxpayers who would be eligible to use medical savings accounts (MSAs) and health savings accounts (HSAs) to provide benefits for their children.
Rev. Proc. 2008-48, released August 19, provides an exception to the definition of dependent in family situations involving divorce or separation, allowing a child to be the dependent of both the custodial and noncustodial parent under sections 105(b), 106(a), 132(h)(2)(B), 213(d)(5), 220(d)(2), and 223(d)(2). (For Rev. Proc. 2008-48, see Doc 2008-17946 [PDF] or 2008 TNT 161-4.)
“This is the IRS’s recognition that the modern family is not what it was 15, 20, and 30 years ago,” said Michael McCormick, executive director of the American Coalition for Fathers and Children. “The IRS is recognizing this changing dynamic and saying we want to incentivize people to take care of their dependents regardless of what the particular structure or makeup of the family is.”
In cases in which parents are divorced, separated, or living apart, the IRS allows only one parent to claim an exemption for their dependent child. Previously, if the noncustodial parent wanted to claim the child as a dependent for MSA or HSA purposes, the custodial parent would have to release his or her claim to the exemption by filing a Form 9332 with the IRS.
Now both parents can take advantage of such benefits. The revenue procedure “allows non-custodial parents to provide medical benefits for their children using pretax dollars through HSAs and MSAs whether or not they are able to claim the dependent exemption,” McCormick said.
The practitioner enthusiasm is not uniform. “I would agree with those who see the rev. proc. as a positive development. It is. It’s taxpayer friendly, and it makes sense,” said Bryan T. Camp, a professor at Texas Tech University School of Law. “The problem is that it’s inconsistent with the position the Service took, not only directly on this point in the preamble to the regulation,” but also in its “refusal to acknowledge in the regulation that the custodial parent has the right to claim the child as a dependent in the first place under 152(e).” (For REG-149856-03, see Doc 2007-10744 [PDF] or 2007 TNT 85-4.)
Camp, who chairs the Individual and Family Tax Committee of the American Bar Association Section of Taxation, participated in the section’s comment project on the proposed regulations under section 152(e). (See Doc 2007-21407 [PDF] or 2007 TNT 183-17 .) “We suggested they make explicit that a custodial parent can claim a dependent deduction for a child’s qualifying relative notwithstanding 152(d)(1)(c),” Camp said.
“This rev. proc. appears to rest on an interpretation of 152(e) contradictory to the interpretation taken in the regulations,” said Camp, who said he was confused as to why the Service put out the new guidance in a revenue procedure. “I think the regulation didn’t do the right thing, and I’m glad to see the Service move in the right direction here by reading the policy behind 152(e) broadly to cover the other code sections,” Camp said.
Frank Palmieri, a partner with Palmieri & Eisenberg, said that despite the revenue procedure’s widespread application, he doesn’t think it will have much impact. “This ruling is going to be so far buried. Probably most accountants and taxpayers aren’t going to be aware of it,” Palmieri said.