Spartanburg Divorce Lawyer & Attorney : Stevens-MacPhail Law Firm : South Carolina Family Law Serving Columbia, Charleston, Greenville, Hilton Head Island

From The Oregon Divorce Blog:

Clients often come to me asking whether they or their ex-spouse/unmarried parent of their child can claim their joint child as a dependents for tax purposes and receive the dependent tax exemption. They often think that this is a decision that is up to them and attorneys often use it as a bargaining chip.

In a divorce or custody case I am representing clients in state court. The United States Congress, through the tax code, has determined how the child/dependent tax exemption should be awarded. The supremacy clause of the United States Constitution prevents state courts from deciding issues of federal law. This means that a state court cannot properly award the exemption to a parent who otherwise would not qualify for the exemption under federal law.

The qualifying parent under IRS rules is the “custodial parent,” which is defined as “the parent having custody for the greater portion of the calendar year.” The award of “legal custody” has no effect on this definition, rather the custodial parent is “the parent with whom the child resides for a greater number of nights during the calendar year.” In cases where the child resides an equal number of overnights with each parent, the parent with the higher adjusted gross income for the calendar year is awarded the exemption.

Parties can agree to share the exemption or to have the parent that does not qualify receive the exemption. This is usually accomplished by a provision in the parties’ judgment. In order to provide the non-qualifying parent with the exemption, the qualifying parent must sign a written declaration and the declaration must be attached to the non-custodial/non-qualifying parent’s income tax return. This can be completed using IRS tax form 8332, which can be found here http://www.irs.gov/pub/irs-pdf/f8332.pdf.

A decision to allocate the dependent exemption to the non-qualifying parent should not be taken lightly. In addition to the exemption, the non-qualifying parent will also receive the child tax credit. Therefore, an agreement to deviate from IRS rules can have significant tax impacts for the qualifying parent and creat a tax windfall for the non-qualifying parent. If the agreement will be included as a provision in a judgment, the decision to do so should be carefully discussed with your attorney.

The IRS Frequently Asked Questions located at http://www.irs.gov/faqs/faq-kw46.html provides detailed information on this question.

Source:  "Who Gets to Claim the Child Tax Exemption?" by Sean Stephens, published at The Oregon Divorce Blog.

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As you are aware, tax filing day (April 15th) is next week, and the following article from the Chicago Family Law Blog provides an excellent analysis of several important issues that divorcing couples face.

Prior to filing for divorce, various federal tax considerations should be reviewed due to their potentially profound implications. Among the major issues commonly covered in a divorce decree or agreement are: alimony, sometimes referred to as "spousal" or "separate maintenance" support; division of property; and child support. Each has its own tax treatment and implications.

Division of Property

Most divorces involve a division of the property owned by the couple. Such a division of property is not usually a taxable event, i.e., neither owes taxes nor gets a deduction from income because he or she receives certain property as a result of the divorce.

There are, however, tax implications following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received such property (pursuant to a divorce) to pay taxes in connection to that property.

Personal and real property have a "basis" for federal tax purposes. The basis is usually the purchase price of the property. When the property is sold later, the amount by which the sales price exceeds the basis is called "capital gain." Capital gain is usually taxable at special rates. Thus, when property distributed pursuant to a divorce decree is subsequently sold by the receiving spouse, the receiving spouse may be required to pay taxes on the proceeds of the sale.

For example, in a divorce, the wife may receive the family home while the husband might receive stock or other investments equal in value to the house. If the house has a lower basis than the stock, when both are sold, the husband could end up with significantly more money, because he owes less capital gains tax.

On the other hand, under tax law applicable at the beginning of 2004, the first $250,000 (for individuals) or $500,000 (for couples) of the taxable gain on the sale of a qualifying personal residence is exempt from tax. In light of these tax issues, selling the house before the divorce, then dividing the proceeds, might make more sense.

Child Support

The parent who is granted custody of the child or children from the marriage, usually receives a set amount of money per month as "child support." Child support payments are not includable in the taxable income of the receiving spouse and are not tax deductible by the spouse making the payments.

If the written agreement or divorce decree orders both child support and alimony and the spouse making the payments pays less than the required total amount, for tax purposes, the child support obligation is deemed paid in full first. Only money exceeding the amount of the child support obligation is treated as alimony.

Alimony or "Spousal Support"

In general, for federal income tax purposes, alimony and "separate maintenance payments" are "deductible" from the income of the spouse paying and includable in income for the recipient. "Deductible" for federal income tax purposes means it is subtracted from a taxpayer's gross income before taxes are calculated, resulting in lower taxes. Taxpayers with a threshold amount of deductions must file a particular form with the IRS when paying income taxes and list such deductions.

Between the time a couple separates and a divorce decree is granted, one spouse may pay money for the support of the other spouse. These payments are deductible as long as they are made pursuant to a decree, court order or a "written separation agreement." In order for alimony payments to be deductible, federal tax laws and regulations require the following:

• The payments are made in cash, check or money order (no promissory notes, transfers or use of property, transfer of services, etc.) to the spouse, or to a third party in lieu of alimony at the written request of the recipient spouse, stating the payments are intended as alimony, and the request is received before the tax return is filed.
• The divorce decree, order or the written agreement of the parties does not identify the payments as something other than alimony.
• The spouses do not file a joint return with each other.
• The spouses are not members of the same household when the payments are made, if they are legally separated under a decree of divorce or separate maintenance – separation within the family home is not sufficient.
• There is no liability to make the alimony payments after the death of the recipient spouse – if part of the payment amount continues after death, that portion is not deemed alimony, and if all of the payment continues, none of it is alimony.
• The alimony payments are not treated as child support.

Source:  "Divorce-Related Federal Income Tax Principles" by Alan Pearlman, published at the Chicago Family Law Blog.

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Your marital status on the last day of the tax year determines your income tax filing status for that tax year. If you have a final decree of divorce as of December 31, you can file as single, or you may qualify for head of household status. However, if your divorce is not yet final as of December 31, you can file jointly or married filing separately.

Usually filing jointly results in a lower tax. However, filing jointly will make you responsible for your spouse's tax liability including penalties and interest, since a husband and wife have "joint and several liability" on a joint return.

To qualify as head of household you must meet the following requirements: 1) You paid more than half the cost of keeping up your home during the year; 2) your home was the main residence for you and your children for half of the year; and 3) your spouse hasn't lived in your home for six months.

Source:  "How Divorce Affects Income Tax Filing Status" by Dan Nunley, published at his Oklahoma Family Law Blog.

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