BRN Tax & Accounting

Family Issues

Changes in marital status, alimony payments, child support and dependency issues are often at the top of the list when it comes to questions about preparing for filing a tax return. In this section we cover what you will need to know when it comes to family issues.

Dependents

Tie-Breaker Rules

It is possible for a child to qualify as a dependent for more than one person. When this happens, the taxpayers can decide between themselves who will claim the child as a dependent. If they cannot agree and more than one person files a return claiming the child, the IRS uses tie-breaker rules to determine which will claim the child.
If more than one person files a return claiming the child…

• and only one of them is the child’s parent, the child will be considered the parent’s dependent.
• and two of them are the child’s parents, the child will be considered the dependent of the parent with whom the child lived the greater portion of the year.
• and same as above BUT the child lived with each parent for the same amount of time during the year, the child will be considered the dependent of the parent with the highest adjusted gross income (AGI).
• and none of them is the child’s parent, the child will be considered the dependent of the person with the highest AGI.

Children of Divorced or Separated Parents

A child who receives more than half of his support from his parents during the year and is in the custody of one or both of them for more than half of the year is normally the qualifying child of the custodial parent. 

However, the noncustodial parent can treat the child as his or her qualifying child or qualifying relative if all of the following apply:

• The parents are divorced, legally separated or lived apart alt all times during the last six months of the calendar year,
• One or both parents provide more than 50% of the child’s support for the year,
• One or both parents had custody for more than half the year, and

The custodial parent signs a written declaration that he or she will not claim the exemption for the child for the tax year, and the noncustodial parent attaches the declaration to his or her return. Or a pre-1985 decree or agreement stipulates that the noncustodial parent may claim the exemption and the noncustodial parent provides at least $600 of support.

The release of an exemption by the custodial parent to the noncustodial parent following the above guidelines only applies for purposes of claiming a dependency exemption and child tax credit for the child.

• The release does not qualify  the noncustodial parent for head of household status,  the earned income credit or the child and dependent care credit.
• Regardless of a release, the custodial parent will still qualify for head of household filing status, the earned income credit or the child and dependent care credit if they would otherwise have qualified.
• A noncustodial parent may claim medical expenses paid for his child even if the custodial parent claims the child as a dependent.

Divorce

Tax Planning

Tax planning should be taken into consideration when negotiating a divorce. Along with seeking legal advice, tax advice should be sought as well. If you are in the considering a divorce, give us a call for ideas on how to structure the agreement to optimize tax savings. The following issues can have serious tax ramifications.

• Filing status for pending tax returns
• Use of the Head of Household tax status and dependency exemptions if there are children
• Structuring alimony payments
• Avoiding alimony recapture
• How to handle the family home
• What to do about health insurance coverage
• Consider the tax basis of property being divided
• Division of pending income tax refunds and refunds applied to next year
• Division of estimated tax payments made
• Transfers of employee stock options
• How to handle the transfer of IRA and retirement plan funds
• Reporting of interest on savings bonds
• Existing family trusts and life insurance
• Custody of tax records
• Breakdown of legal fees to show amounts related to tax planning
• Collection of overdue child support

Joint Liability

Generally, couples who file jointly are each individually and jointly responsible for any tax, interest or penalty applicable to the return. This is true even if the divorce decree states that one spouse is responsible for previously filed joint returns. This means that the IRS can collect from either spouse 100% of the tax liability, penalties and interest for any unpaid tax from joint returns, or any back taxes incurred through a subsequent audit of a joint return.

Alimony

Alimony payments are deductible by the payer and taxable to the payee. To qualify as alimony, all of the following criteria must be met:

• Payments must be in cash (includes checks, money orders, bank transfers and garnishments)
• Payments must be required by a decree
• Divorce agreement may not designate the payment as “not alimony”
• Spouses may not be members of same household
• Payment may not be treated as child support
• Payer’s liability to make payments must cease upon death of the recipient
• Parties may not file a joint return

The payor spouse cannot deduct payments made before the alimony commencement date specified in the divorce decree. Such payments are considered to be voluntary payments that are not deductible alimony. Other payments that do not qualify as alimony include:

• Child support
• Noncash property settlements
• Payments that are the spouse’s part of community property income
• Payments for use of property
• Payments to keep up the payer’s property

Overdue Support/Alimony

If a spouse is obligated to pay both alimony and child support under a decree, but pays less than the total monthly amount due, the payment made is first applied to satisfy the child support obligation. Therefore, the child support obligation must be met before any amount of alimony is deductible.

Tax law is complex and general rules do not always apply to your situation. Please call us today (619.422.6181) for an appointment to discuss your tax situation or email us at info@brntax.com.