One of the most important aspects of the divorce process is tax planning, yet it is possibly one of the least understood. Taxation issues are an essential aspect of most divorce cases and must be carefully handled prior to the dissolution of the marriage. Indeed, tax issues can determine certain aspects of the litigation. For instance, where one spouse earns substantially less than the other, various tax strategies can be used to legally shift income from the higher-earning spouse to the lower-earning spouse.
All of the available tax strategies are too numerous to reference and may change due to the needs of the parties, the complexities of the case or with new tax regulations and revenue rulings. When you’ve got a business to run and teams to lead, something life-altering like a divorce, can take a lot of time and due diligence. So here’s a non-exhaustive review of the basic taxation rules you should know about in matrimonial litigation.
Child Support And The Dependency Exemption
Child support is neither deductible nor taxable. This should be obvious — Congress wouldn’t want to encourage divorce (or discourage marriage in the first place) by making the support of children deductible. The problem most payors of child support is that it is not deductible from your taxes. Therefore, most payors are not too happy about this legal issue.
The IRS publication reads, and requires, according to FindLaw, that “The custodial parent signs a Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or a substantially similar statement, and provides it to the noncustodial parent who attaches it to his or her return. Please beware that if the custodial parent releases the exception, the custodial parent may not claim the Child Tax Credit.”
Unlike child support, alimony is deductible to the payer to the extent that it is included in gross income to the recipient under IRS §71. What many parties do is provide for unallocated support, neither classified as alimony nor child support in their decree, and thus they meet the requirements of §71(c)(2). This makes such support dependent on contingencies directly related to the child, such as reaching a certain age, getting married, becoming employed, passing away or something similar. Spousal support give the party the benefit of writing off the payment in their taxes. Agreements can always be made to make the write off exempt if both parties agree.