Identifying the Tax Consequences of Divorce Part 2
4. Which parent gets to claim the child as a dependent?
Arizona has specific guidelines for the assignment of the federal tax exemption for dependent
Children that are established in Section 27 of the Arizona Child Support Guidelines. Here is the relevant text from Section 27:
All the federal and state tax exemptions applicable to the minor children shall be allocated between the parents as they agree, or in the absence of their agreement, in a manner that allows each parent to claim allowable federal dependency exemptions proportionate to adjusted gross income in a reasonable pattern that can be repeated in no more than 5 years. This may be done by allocating claiming of the children or claiming of specific years.? To implement this provision, the proportionate share of the combined? adjusted gross income nearest fraction with a denominator of no larger than 5 (i.e. ?, 1/3,
2/3, ?, ?, 1/5, 2/5, 3/5, 4/5).
For illustrative purposes, assume father earns $60,000 and mother earns $40,000 of the combined adjusted gross income of $100,000.? Father?s share of the combined income is 3/5. If father earned $30,000 and mother earned $20,000, then 3/5 would still be the fraction with a denominator of 5 or less that comes closest to father?s share of the parents? combined adjusted gross income. The dependency
exemption shall therefore be allocated utilizing this fraction. If a party who is otherwise entitled to the dependency exemption? would derive? no tax benefit from claiming? it in any given tax year, then the entire exemption for the tax year, and not just the share indicated by the preceding sentence, may? be allocated to the? parent who would derive a tax benefit for that tax year. An Internal Revenue Service form 8332 may need to be signed and filed with a parent?s income tax return.
The court may deny the right to a present or future tax exemption when a history of nonpayment of child support exists. The allocation of the exemptions may be conditioned upon payment by December 31 of the total court-ordered monthly child support obligation for the current calendar year and any court-ordered arrearage payments due during that calendar year for which the exemption is to be claimed. If these conditions have been met, the custodial parent will need to execute the necessary Internal Revenue
Service form (Form 8332) to transfer the exemptions. If the non-custodial parent has paid
the current child support, but has not paid the court-ordered arrearage payments, the noncustodial parent shall not be entitled to claim the exemption.
EXAMPLE: Non-custodial parent’s percentage of gross income is approximately 67%
(2/3) and custodial parent’s percentage is approximately 33% (1/3). All payments are
current. If there are three children, the non-custodial parent would be entitled to claim the
exemption for two children and the custodial parent would be entitled to claim the
exemption for one child. If there is only one child, the non-custodial parent would be
entitled to claim the child two out of every three years, and the custodial parent would
claim the child one out of every three years.
For purposes of this section only, a non-custodial parent shall be credited as having paid
child support that has been deducted on or before December 31 pursuant to an order of
assignment if the amount has been received by the court or clearinghouse by January 15
of the following year.
I am not a tax professional and this information is not intended as tax advice. Refer your clients to an independent tax professional in any situation where a client requires tax advice.
5.? Do I need to pay taxes relating to the division of our assets?
No, the general rule (IRS 1041) is that most assets can be divided between divorcing spouses without the creation of taxable events. Language should be included in the property settlement agreement citing IRS 1041. Here?s an example:
?The parties intend the distribution of property herein to be considered a property settlement and a transfer incident to divorce and, therefore, a non-taxable event under the current federal and state tax codes, including Section 1041 of the Internal Revenue Code. Neither party shall treat the division of property provided for herein as a sale or as giving rise to gain or loss for federal income tax purposes or as entitling a party to an adjustment in the basis for income tax purposes of any item or property retained, received or transferred by this Agreement. Should either party violate the provisions of this paragraph and thereby cause tax liability to the other party, the party causing liability shall hold the other harmless and pay all consequential liability of the other party?
Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they are made “incident to divorce,” which means those that occur: within one year after the date the marriage ends; or within six years after that date as long as they are made pursuant to your divorce or separation agreement.
I am not a tax professional and this information is not intended as tax advice. Refer your clients to an independent tax professional in any situation where a client requires tax advice.
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