Tax Tips and Updates
TaxTIP #1 Married Filing Separately Advantages and Disadvantages
Usually when a married couple files separate returns they will usually pay more tax than if they filed joint returns. One of the benefits of reviewing the situation with a knowledgeable tax adviser is that sometimes filing separately can be the the best way to file. Here are some of the advantages and disadvantages of filing separately:
TaxTIP # 2 Caution for Divorcing or Separating Couples
In the case of divorced parents, generally only one parent will be able to claim each child as a dependent. A qualifying child usually lives with the parent for more than one-half the taxable year, meets certain age requirements, and has not provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins. An individual meets the age requirement if such an individual has not attained the age of 19 by the close of the calendar year or is a student and has not attained the age of 24 as of the close of such calendar year. Permanently and totally disabled children are treated as meeting the age requirements regardless of age.
The parent who lives with the child for more than half the taxable year is the custodial parent. A non-custodial parent can claim a dependency exemption if a decree of divorce or separate maintenance or written separation agreement between the parents provides:
- The noncustodial parent shall be entitled to any personal-exemption deduction; or
- The custodial parent will sign a written declaration that such parent will not claim such child as a dependent for such taxable year.
- In a recent tax case, the noncustodial parent was denied the exemption for the dependent child, notwithstanding the fact that the divorce order clearly stated that the noncustodial parent was so entitled. The reason the court gave was that he failed to attach a written declaration from the custodial parent stating he or she would not claim the child as an dependent for the taxable year. IRS form 8332 is used for this purpose and should be signed by the custodial parent and attached to the return of the noncustodial parent.
Many divorces and separations are bitterly contested and negotiations get bogged down with emotions and blame. Settlement seems like a far distant mirage and fades to non-existent as things go from bad to worse. Battles can arise over the signing of form 8332 and other such documents during the negotiations. This situation is unfortunate because both parties suffer as well as the children. We have worked with divorcing married couples and business partners and have helped them see the wisdom of working out the bulk of the financial settlement before the lawyers get involved. Much can be agreed upon using accountants and mediators and then taking the unresolved issues to the lawyers to work out the final points. Divorce attorneys are important to make sure their client’s rights are protected and each person in the divorce or separation needs to have the benefit of the divorce attorney’s experience; but as one judge told me early in my career as a CPA – “you’re a smart business man – right now you and your adversary have control of the situation – once you turn the case over to me I will have control and one of you will be very unhappy I assure you!” So I pass this wisdom on to you. If you can’t see daylight at the end of the settlement tunnel turn on the lights and settle out of court in mediation!