Eaton Peabody

IRS Provides Interim Guidance on the “Tie-Breaking” Rule;

MRS Issues Revised Form W-4ME – September 29, 2006

IRS Notice 2006-86

The IRS has issued interim guidance in Notice 2006-86 on the “tie-breaking” rule under Section 152 of the Internal Revenue Code, which rule applies in the event two or more taxpayers claim the same qualifying child for purposes of one or more of the following: 1) head of household filing status; 2) the child and dependent care credit; 3) the child tax credit; 4) the earned income credit; 5) the exclusion for dependent care assistance; and 6) the dependency deduction. The tie-breaking rule provides that if both taxpayers claiming the child as a qualifying child are the child’s parents who do not file a joint return together, the child is treated as the qualifying child of the parent with whom the child resides for the longer period of time during the calendar year. If the child resides with both parents for the same amount of time, the child is treated as the qualifying child of the parent with the higher adjusted gross income for the taxable year. The Notice clarifies that, unless the special rule in Section 152(e) applies, the tie-breaking rule applies to the foregoing provisions as a group, rather than on an individual basis. The IRS plans to issue regulations in the near future that will be consistent with the provisions of the Notice.

The special rule in Section 152(e) provides that a child may be treated as the qualifying child of the noncustodial parent for purposes of the child tax credit and the dependency deduction. In order to be able to claim the child under either or both of these sections, the child must be in the custody of one or both parents for more than half of the calendar year, the child must receive more than one-half of his/her support from the parents, the parents must be divorced or separated under a written separation agreement, or must live apart during the last 6 months of the calendar year, and the custodial parent must release its claims to the tax benefits to the noncustodial parent in a written declaration that is attached to the tax return of the noncustodial parent.

Revised Form W-4ME

Form W-4ME has been revised to incorporate the new optional single withholding rate for married employees and the new elections for exemption from Maine income tax withholding.  Employers must begin using the new version on or before January 1, 2007 for all new employees and all employees who make changes to their withholding.  Employees who are currently withholding at the married with two incomes rate will need to submit a new Form W-4ME by January 1, 2007 and select a withholding rate specified on the form. The form will be available from Maine Revenue Services in October. 

If you would like further information regarding the subject matter of this client alert, or if you would like guidance regarding the impact of this information on you or your business, please contact Christine Worthen a shareholder in Eaton Peabody's Tax Practice Group.


This alert is provided as general information, and is not a substitute for legal or other professional advice.