There are numerous decisions that have to be made during the divorce process in Los Angeles County. Who will get custody of the kids and where will they live? How much child support will have to be paid? Who will keep possession of the home? How will the property be divided? Among the stress and all other various issues involved in getting a divorce, the tax implications are typically overlooked.
While considering a divorce, you could benefit in consulting with a Los Angeles divorce lawyer at Furman & Zavatsky LLP. Our attorneys not only represent your interest in divorce case, we will take the necessary time to explain the tax implications. We understand that compared to all the major life-changing decisions that must be made in a divorce, taxes are often at the bottom of the list of priorities.
However, if you just give up your right to claim the children on your tax return, it could have a significant impact on your finances. As tax season approaches, filing your taxes as a recently divorced single filer frequently has challenges. If you address the income tax issue during the divorce process, it can have save you a lot of money later.
Federal tax laws do offer some tax breaks for individuals with children. You are most likely already aware of the higher standard deduction, exemptions for each child, child tax credits, and of course the deductions for child care expenses. While you were married, you and your spouse share deductions. After your divorce, these deductions can't be shared.
If the Los Angeles child custody court order splits time equally between parents, the parent with the highest income will be allowed to claim the child on their tax return. In cases where you are the custodial parent, you can give your ex-spouse the right to claim your child as a dependent on their tax return. In divorce cases where there is more than one child involved, the parents can choose to split the deductions on their tax returns.
In some divorce cases in Los Angeles County, the agreement will require the custodial parent to forfeit their right to a tax exemption. In order to determine what choice is right for you, contact our Los Angeles divorce attorneys to thoroughly review your situation and to discuss your legal rights. Now that we have covered a general overview of filing taxes after a divorce, let's take a closer look at the legal language below.
Which Parent may Claim the Child on Federal Tax Return?
Under the Internal Revenue Code, there are tax breaks for college students, a dependent care credit, a child tax credit, and the dependent exemption for each child. Each of these tax benefits has eligibility rules and income phase-outs. This article will focus on the dependent exemption.
What exactly is the dependent exemption? Exemptions reduce taxable income. The two main types are personal exemptions and exemptions for dependents. For 2017, the personal and dependent exemptions were $4,050, slated to increase to $4,150 per person for 2018.
However, in exchange for doubling the ‘standard deduction,' personal and dependent exemptions were eliminated for 2018. These changes came in place when the tax code was substantially overhauled at the tail end of 2017. That is when President Trump signed these changes into law.
The exemptions were not officially eliminated, but rather, ‘suspended' until 2025. That's a long way off, and much discussion about dependent exemptions is no longer relevant. However, that law still applies to 2017 tax returns (and prior filing years), and this overview will be helpful for those affected.
How the Dependent Exemption Worked
A taxpayer could usually claim an exemption for each dependent. A “dependent” is not necessarily a child. It could also be a relative who meets a set of tests. However, a spouse cannot be a dependent. For each dependent, their social security number must be listed on the tax return. See Internal Revenue Service (IRS) Publication 501 for comprehensive instructions.
To claim a child as your dependent, they must pass the ‘qualifying child' or ‘qualifying relative' test. For purposes of the dependent exemption, a qualifying child is younger than the taxpayer and is less than 19 years old or is a ‘student' younger than 24 years old. No age limit applies if the child is “permanently and totally disabled” (or otherwise meets the ‘qualifying relative test,' a discussion of which is beyond the scope of this article).
Divorce: Who Claims the Dependent Exemption on their Tax Return?
Remember, Federal law controls when it comes to tax exemptions. So even if a State court decides differently, the Federal rules must be followed. The basic rules are simple. With divorced couples, where a joint return is not filed, only one dependent exemption can be taken. If both parents claim the exemption, the IRS will usually only allow it to the parent where the child lived most during the tax year.
My Child Does Not Live With Me. Am I Disqualified from Taking the Dependent Exemption?
No. This happens often. If the custodial parent agrees not to take the exemption on their tax return, the non-custodial parent can use it. We often use this in divorce settlement agreements (for example, alternating the exemption(s) each year, between husband and wife).
However, regardless of what a court order or your settlement agreement may say, the custodial parent must still sign IRS Form 8332 (or similar document). If you need additional information, contact the Los Angeles Divorce Lawyers at our law firm.
If you inadvertently claimed the exemption when you were not entitled to do so, you should file an amended return as soon as possible. Although that may increase your taxable income, it may avoid surcharges for additional interest, penalties, or other fees. You also reduce the risk of assessment (or even more seriously, audit), if the IRS discovers the exemption was claimed twice (i.e., on each spouse's return).
Other Factors to Consider
- Parents cannot “split” the dependent exemption; it may only be used in whole (not in part).
- There are many situations where it makes economic sense to let the non-custodial parent claim the dependency exemption each year (rather than alternating years). One example of this is a scenario in which the custodial parent has little (or no) taxable income, but the non-custodial parent (who usually pays child support) does have taxable income.
- Purpose of Form 8332 Release is to release the custodial parent's claim of exemption without imposing any conditions. However, if a non-custodial parent fails to make required child support payments, the other parent can revoke the form (after first giving the non-compliant spouse reasonable notice).
Contact our Los Angeles Divorce Attorneys
Financial decisions are difficult in the event of a divorce. If you are having issues determining how to claim an exemption for your child on your taxes, it can be helpful to speak with an experienced family law attorney.
The Los Angeles divorce attorneys at Furman & Zavatsky LLP can outline all of the options and provide helpful legal advice. You can call us today at 818-528-3471, or contact us online to set up an appointment closely review the details of your situation.