February 2017: Dependency Exemptions for Divorced or Separated Parents

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

At this time of year, questions often arise as to which of two parents—recently divorced or presently separated—is entitled to the dependency exemption for a child of the marriage.

General Rule under IRC Section 152(e)

IRC Section 152(e) provides a special rule for the right to claim an exemption of a child of divorced or separated parents who, for the year in question:

  • Are divorced or separated under a decree of divorce or separate maintenance at year end; or,
  • Are separated under a written separation agreement at year end; or,
  • Have lived apart at all times during the last six months of the year.
  • And, on a combined basis, had custody of the child for more than half the year; and,
  • On a combined basis, provided more than half the child’s support for the year (support received from a new spouse of a remarried parent is considered provided by that parent).

If these conditions are satisfied, the custodial parent (defined as the parent having physical custody for more than half the year) is automatically entitled to the exemption for a child regardless of:

  • of what the decree or agreement provides
  • which parent furnished more than half of the child’s support.

Waiver Exception to General Rule

For any specified year, or years, or for all future years, the custodial parent may release his or her right to claim the exemption for a child to the noncustodial parent.
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Continued in PDF file below… “Dependency Exemptions for Divorced or Separated Parents”
View / Download February 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section

October 2015 : Overview of Unallocated Family Support Payments

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Tax Benefit

  • Combined payments of spousal support and child support – referred to as “family support” – are taxable/deductible under IRC Section 71.
  • Family support is advantageous from a tax standpoint if the support payer (assume H) is in a significantly higher tax bracket than the payee (W).
  • By structuring payments as family support, the child support component – which is generally nontaxable/nondeductible – is converted to taxable/deductible.
  • However, so W is not short-changed, the child support component of the family support payment must be in- creased to cover the tax thereon.
  • To illustrate:
    • H’s average combined federal and state tax bracket is 40% and W’s is 20%.
    • In their divorce settlement, spousal support is $2,500 a month and child support is $1,000.
    • After-tax, the payments are as follows:
      (Table in PDF file)
    • If the child support component is increased to $1,450 and included with spousal support as $3,950 family support, the result is:
      (Table in PDF file)
    • So, by converting child support to family support, Uncle Sam kicks in $3,420 a year, split approximately evenly between H and W.

Requirements to Qualify as Family Support

Continued in PDF file below… “Overview of Unallocated Family Support Payments”
View / Download October 2015 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section

April 2015 : Four Federal Income Provisions Relating to Divorced or Legally Separated Parents Providing Child Support

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following presents basic information on four federal income provisions relating to divorced or legally separated parents providing child support for one (or more) dependent child. These provisions (1) often provide significant tax savings – particularly to parties of modest means – and (2) are often overlooked by divorce counsel who can provide a valuable service by advising clients to check to see if they qualify for any of such tax benefits.

Dependency Exemptions General Rule

IRC Section 152(e) provides that if the parents, on a combined basis, (1) provide more than half a child’s support for the year and (2) have physical custody for more than half the year, then the parent having physical custody for more than half the year (the custodial parent) is entitled to the exemption.

The custodial parent may “release” the exemption to the other parent by executing a written waiver for (1) one year, (2) a specific number of years, or (3) all future years. IRS Form 8332 is the waiver that the custodial parent must execute to release the exemption. e non-custodial parent must attach the executed Form 8332 to his/her tax return for the year(s) for which the exemption has been released.

Other Aspects of the Dependency Exemption

  • The above applies to parents living apart for the last six months of the year as well as to divorced or legally separated parents.
  • “Physical custody” for more than half the year is deter- mined based on overnights. If overnights are equal, the parent with the higher adjusted gross income is deemed the custodial parent.
  • The waiver can be used to, effectively, provide that the parents will claim the exemption in alternating years.
  • Support provided by a parent’s new spouse, or his/her parents, is deemed provided by the parent.
  • The custodial parent may revoke the waiver by executing Part III of Form 8332. Such a revocation applies to the succeeding tax year.
  • The federal income tax exemption amount is $4,000 for 2015.

Phase-Out of the Tax Benefit of Personal and Dependency Exemptions

The tax benefit of personal and dependency exemptions is phased out for high income taxpayers.

The adjusted gross income (AGI) amounts at which the phase-out applies are as follows for 2015:
(Table shown in PDF below)

A taxpayer’s deduction for personal and dependency exemptions is reduced by 2% for each $2,500, or fraction thereof, that his/her AGI exceeds the above threshold amounts.

Example: A single individual has a $300,000 AGI. In addition to his personal exemption, his ex-wife has released the dependency exemption to him for their minor child who lives with her. The phase-out works as follows:

  • Two exemption deductions unreduced – 2 x $4,000 = $8,000
  • Number of $2,500 amounts, or a fraction there- of, by which AGI exceeds threshold – $300,000 – $258,2500/$2,500 = 17
  • Percent reduction in exemption deduction – 2% x 17 = 34%
  • Reduced exemption deductions – 100% – 34% = 66% x $8,000 = $5,280

Practice Pointers
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Continued in PDF file below… “Four Federal Income Provisions Relating to Divorced or Legally Separated Parents Providing Child Support”
View / Download April 2015 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section