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Dependency Exemption Non-Custodial Parents

The Internal Revenue Service released a memorandum in 2009, clarifying the rules governing non-custodial parent’s ability to claim a dependency exemption for their child.

Previously, the Service allowed a non-custodial parent to claim an exemption for a child if the custodial parent signed a written declaration releasing claim to the exemption and the non-custodial parent attached that declaration to their return. IRS Form 8332 is available to document this release.  In Publication 501, Exemptions, Standard Deduction, and Filing Information, the Service has stated that a non-custodial parent may attach certain pages of a divorce decree or separation agreement, instead of Form 8332, if the attached pages include the information required on the form. Click here for more information from the IRS.

The Problem

A problem arose in the ambiguous language of the actual code.  It stated the release of a claim must be on Form 8332 or, if not on such form, must “conform to the substance of such form.” The ambiguity begat creativity and family law attorneys began drafting the declarations into settlement agreements. Taxpayers would then simply need to attach a copy of their divorce decree. This eliminated the need for Form 8332 and therefore, the need to speak to your ex-spouse every year requesting a signature.

The recent memorandum was directed specifically at the question whether it was allowable for a non-custodial parent to prove their right to the exemption by submitting proof of satisfaction of a condition in a divorce decree. The condition was that the non-custodial parent may only claim the exemption if current in his or her support obligation. This raises the problem of substantiation.

In the 2009 memo, the Service concluded the release must be on Form 8332 or must be a document conforming to the substance of Form 8332 and has as its only purpose the release of a claim to exemption. A divorce decree, separation agreement or parenting plan allowing a non-custodial parent to claim an exemption for a child, only if a condition is met, does not conform to the substance of Form 8332.  For tax years beginning after July 2, 2008, a settlement agreement, decree or judgment may not be used by a non-custodial parent to substantiate a dependency exemption for a child.

These regulations reflect the Service’s concern about substantiating a claim to a dependency exemption for a child and are intended to avoid problems of proof, minimize controversy, and minimize costs to parents.  The change does not preclude a non-custodial parent from claiming the exemption; it simply requires more care be made to make sure this is accomplished.

It may be helpful to include language stipulating the custodial parent will execute Form 8332 on a yearly basis. This follow up challenge can be alleviated by insuring the newly single parents consult a financial advisor with specific experience in the field of divorce financial planning. Two parents claiming an exemption for the same child will end in IRS audits for both and possibly bring a settled case back into the courtroom.

6 Financial Steps to Preparing for Divorce in 2017

financial steps

Are you planning to divorce in 2017?

Take a look at our recommendations for 6 Financial Steps to Preparing for Divorce in 2017.

1. Keep an eye on the mail-box.

Every financial document that hits your mailbox in the month of January is worth your time. You should gather Bank and Brokerage account statements showing year end balances and the year end spending summary sent out by most Credit Card companies. You may also start to see tax documents being sent.

If you aren’t sure whether the document is pertinent to your Divorce in 2017, keep a copy anyway just in case. Financial knowledge will equal power for your Divorce in 2017. The more you can get now the more prepared you will be to advocate for yourself and obtain the most financially advantageous settlement possible in the new year.

2. Make copies of all financial files in your home.

This includes 5 years of tax returns, Brokerage and Bank account statements, business ownership documents such as partnership agreements and wills and trusts. Again, if you have any reason to believe the financial document will be important to your Divorce in 2017; you should keep a copy. It is always better to be over-prepared.

3. Educate yourself about your divorce options.

We believe most couples can resolve their differences outside of court. Make an appointment with a Wellspring Divorce Advisors advisor who will educate you about the process options available for your Divorce in 2017. Staying away from the court system will save emotional and economic resources and should result in a more advantageous financial settlement.

4. Consult with a lawyer or two or three or four.

Your Wellspring Divorce Advisors professional can refer you to many high quality divorce lawyers in your community. Concentrate your search on attorneys who specialize in Family Law. You wouldn’t go to your primary care physician for a tonsillectomy so don’t go to your real estate attorney for your divorce.

5. Develop a budget for your Divorce in 2017.

Divorce is hard on the checkbook. You will have expenses of two households, expenses to set up that second household such as furniture and furnishings. If you already have a family budget you can use this as a guide to start your individual divorce budget. If you don’t have one, begin by looking at the bank and credit card statements you gathered in steps 1 and 2.

First get a feel for the recurring expenses like mortgage and utilities then make estimates of discretionary expenses like dining out and entertainment after averaging a couple of months’ worth of real data gathered from the statements.Finding a way to maintain some level of a similar lifestyle during the divorce proceedings is not easy for most but this is a time for you to be comfortable, not feeling destitute.

Wellspring Divorce Advisors is experienced in creating budgets and available to assist clients in developing a budget for their Divorce.

6. Open a credit card in your individual name.

If you do not yet have a credit card in your name alone we suggest you apply for one immediately. It is common for one party to lose access to cash after filing for divorce. If you do not have cash you cannot pay the professional help you need to protect yourself in the divorce process.

Try Capital One for a good starting point. They usually provide good rewards such as airline or cash back on their cards as well as good size credit limits. Aim for $20,000 of total credit card limits. Be careful not to spend too freely on the cards and try to stick to just using them for professional fees if possible.

Divorce and Taxes: How they can affect your financial future

taxes, divorce financial analyst

Taxes are guaranteed to be a complication of every divorce financial settlement. Misunderstanding the tax code, even worse completely ignoring it, can have devastating effects on your financial future.

The errors get more costly and more common when estates and incomes get larger and people start getting creative. Negotiating a creative and mutually beneficial divorce financial settlement can be complicated when you have significant assets and income. Make sure you and your attorney have the help of a financial expert skilled and experienced in navigating the tax codes of divorce. Here are some common errors.

Exemptions

Failure to consider the value of dependency exemptions and filing status for income taxes. High earners are often phased out of using dependency exemptions, failure to negotiate the use post divorce could waste tax dollars.

 

Child Support

Not understanding the difference between child support and spousal support for tax purposes. Spousal support is taxable to the recipient, tax deductible for the payer.

 

Spousal Support

Structuring future changes in spousal support in close proximity to an event or mile-stone related to your children. This is also known as the Child Contingency rule and could cause tax deductible spousal support payments to be re-classified as non-deductible child support.

 

Attorney Fees

Failure to deduct attorney fees related to spousal support dispute as a miscellaneous itemized deduction. Yes your attorney fees are deductible to the extent they were incurred in the process of seeking tax advice or spousal support. You will need to ask your lawyer for an itemized break out of the litgiation costs. This can be incredibly valuable in protracted, expensive litigation.

 

IRS

Running afoul of Section 1041 of the internal revenue code. Section 1041 is the IRS code that allows spouses, married or divorcing, to transfer assets to one another without tax consequence. There are however rules to follow like how ling you have to complete a transaction.

 

Incorrect Assumptions

Assuming your CPA understands the tax code related to divorce. They can certainly look things up but it is a bad idea to assume your CPA understands the tax intricacies of divorce. The last time I spoke to a California Society of Certified Public Accountants group there were 200+ CPA’s in the room and 200+ questions after the presentation.

 

 

wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

Planning for Post Divorce College Funding and Taxes

2009 and 2010 bring a slew of changes to the structure of tax credits and deductions in the Federal Income Tax system. Today I would like to draw attention to the American Opportunity Tax Credit. The American Opportunity Credit expanded and renamed the Hope Credit for tax years 2009 and 2010. The expanded credit increases the total available credit to $2,500 per year for the first four years of post secondary education. This is an increase of $700 over the old Hope Credit. The Hope Credit was also only applicable to the first two years of school. Adding $700 per year and an additional two years to eligibility make the new credit worth up to an additional Read more