Personal exemption deductions for children can be valuable — $3,200 per child for 2005 ($3,100 for 2004). And, while the general rule is that the custodial parent automatically receives the write-off, the parents can agree to override this general rule and allocate the exemptions in any manner they can agree upon. (Allowing your ex to have the child's exemption won't preclude you as the custodial parent from being able to claim head of household filing status, which is better than single filing status.)
For example, say there are two kids who will both live primarily with the mother. The father (the noncustodial parent in this case) can be given the exemption for one child while the custodial parent (the mother) claims the other. Or the father can be given both. Or each parent can take both exemptions every other year. Any other arrangement the parents can agree on is OK too.
However, you must also keep the Internal Revenue Service happy. For any year an exemption is given to the noncustodial parent, that person must file a copy of Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) with his or her return. The custodial parent must sign the form. The original should be kept with the noncustodial parent's tax records.
If you will be the noncustodial parent, make sure to get Form 8332 autographed by your soon-to-be ex at the final powwow when all the other divorce-related documents are being signed. If you forget, good luck getting your ex to sign off later. A recent court decision said a noncustodial parent was not entitled to the exemptions for his kids, even though the divorce decree clearly said he was. Reason: no signed Form 8332. Case closed.
Remember, the exemption is even more important if you are counting on claiming the child tax credit (worth up to $1,000 per qualifying kid) or either of the two education tax credits for your child's college expenses (worth up to $2,000). Even if you are footing all the bills, these tax breaks are off-limits unless you can also claim the exemption for the child in question.