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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Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)