FAMILY LAW TAX CONSIDERATIONS

The federal and state income tax codes are so complicated that each situation must be carefully considered based on particular facts.  I have proprietary software that allows me to quickly determine how the personal exemptions and child tax credits should be divided between the parties, what is the best division of head of household and earned income tax credits in shared custody cases and whether it is better to get a divorce or annulment finalized prior to the end of the year or after the start of the next year.

This information assumes that you have a working knowledge of the federal and Kansas income tax systems (i.e. you are a tax payer) and all of the calculations are for the tax year 2009.

 1.  DIVIDING PERSONAL EXEMPTIONS & CHILD TAX CREDITS 

In general, it is best for the parent in the higher income tax bracket to claim the personal exemptions involving the parties’ children because that parent has a more effective use of these tax considerations.  One personal exemption for a parent in the 25% federal income tax bracket is worth a tax reduction of 25% of $3,650 (the value of federal personal exemption) or $912.50, compared to the value of the personal exemption for a parent in the 10% federal income tax bracket with a tax reduction of 10% of $3,650 or $365, thus generating a savings of $547.50.  However, the Kansas Child Support Guidelines do not indicate how that savings is to be divided between the parents and this simple calculation ignores the problems of determining the tax payer’s bracket starting from adjusted gross income to taxable income and having the personal exemptions spread out over several tax brackets. 

Furthermore, the child tax credit of $1,000 per child under 17 is always paired with the personal exemption.  This tax consideration is reduced when the adjusted gross income of the taxpayer is greater than $75,000 per year and is reduced when the adjusted gross income of the taxpayer is less than shown in this table for the number of children: 

This pattern of reduction in the child tax credit at either low or high income means that in some cases the transfer of the personal exemptions and child tax credits from the low income parent to the high income parent could increase the parents’ total tax liability. 

For example, if the custodial parent’s annual income is $20,000, the non-custodial parent’s annual income is $115,000, and they have two (2) young children, the parents save $553.56 a year in federal and Kansas income taxes if the custodial parent claims these two (2) tax considerations rather than the non-custodial parent.  This unexpected result is because the non-custodial parent can’t claim any of the two (2) child tax credits of $1,000 per child because that parent has too much income. 

I have software that can calculate the best tax savings for the parents.  If you want me to do the calculation, e-mail me each parent’s annual gross income for the year and the number of personal exemptions and child tax credits (for children under 17 at the end of the year).  I will determine the best distribution of these tax considerations, the actual tax savings, and how to divide these savings, free of charge.   

2.  DIVIDING HEAD OF HOUSEHOLD IN SHARED CUSTODY CASE 

It is becoming more common to have shared custody where the children spend equal time with each parent.  This means that if there is only one child, the parents can alternate the head of household tax filing status and, if applicable, the earned income credit.  If there is more than one child, then each parent can possibly claim head of household status and the earned income credit each year. 

However, the earned income credit is phased in, has a plateau, and then is reduced based on the earned income of the tax payer.  Thus a simple splitting of personal exemptions, child tax credit, head of household status and earned income credit may not be the best tax strategy. 

For example, if the parents have two (2) young children with one parent’s income at $15,000 and the other parent’s income at $52,000, the parent with the lower income can save $944 in taxes and the parent with the higher income can save $732 in taxes (for a total savings of $1,676) if the lower income parent claims head of household and earned income credit for both children and the higher income parent claims the personal exemptions and child tax credit for both children. 

I have software that can calculate the best tax savings for the parents when both parents have the ability to claim all of these tax considerations due to shared custody.  If you want me to do the calculation, e-mail me each parent’s annual gross income for the year and the number of personal exemptions and child tax credits (for children under 17 at the end of the year).  I will determine the best distribution of all four of these tax considerations, the actual tax savings, and how to divide these savings, free of charge.   

3.  TIMING THE END OF THE MARRIAGE 

Under the current tax code, is possible to have both marriage bonuses and penalties.  For example, a family of four (4) with the custodial parent making $20,000 a year and the non-custodial parent making $40,000 a year will save $1,738 if they complete their divorce prior to the end of this year as opposed to after the start of the next year. 

On the other hand, for a childless couple with only one of the parties having an annual income of $72,000, they would save an incredible $10,582 if they complete their divorce after the start of next year as opposed to the end of this year. 

I have software that can calculate whether the best tax savings for the parties is at the end of the current year or the start of next year.  If you want me to do the calculation, e-mail me each party’s annual gross income and the number of personal exemptions and child tax credits (for children under 17 at the end of the year).  I will determine the best distribution of these tax considerations, the actual tax savings, how to divide these savings, and what year to finalize the divorce or annulment, free of charge.