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Tax planning before divorce

Thursday, February 22, 2018

Taxes can play a serious role in divorce in Texas and should be considered in the first steps of planning. For example, legal federal tax stratagems can shift income from higher-earning spouses to the spouse with less income and play a role in divorce litigation and the shaping of the decree.

Congress never wanted to encourage divorce or discourage marriages Accordingly, it never made child support deductible or taxable.

Only one parent can claim the dependency exemption. In most cases, the parent who pays more than half of the child support during the tax year is identified as the custodial parent. Typically, this parent may claim a tax exemption for the child if certain conditions are met.

These include whether the child resides with one parent more nights than the other parent and absences from parents. There are times, however, where the noncustodial parent may be considered as the parent who paid over half of the child support and receive different tax treatment.

To claim this exemption, a custodial parent must execute a form releasing an exemption claim for divorce or separated parents. The custodial parent then gives this form to the noncustodial parent who must attach it to their federal tax return. If the custodial parent releases the exemption, that parent cannot claim the child tax credit.

Alimony is treated differently to its payer than child support because it is deductible. This support is part of the taxable gross income of the support's recipient. Unallocated support, payments that are designated as either spousal or child support, has different tax consequences. This includes certain situations involving the child such as the child reaching a certain age, whether they get married, their employment or whether they pass away.

Tax planning may change depending on the need of the spouses, the complexity of their divorce, changing tax regulations and IRS tax rulings. An attorney can help spouses pursue a divorce edict that has more favorable tax consequences, addresses financial challenges and which protects their rights.

Source: Forbes, "Taxes and family law: A cheat sheet of what you need to know," By Stephen Hicks, Sept. 8, 2017

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