Divorces and separations are governed by specific tax code rules that may have a significant impact on the finances of Pennsylvania residents, especially if there are children involved. It may be appropriate to obtain the relative information when settlement discussions take place. With the guidance of an experienced divorce attorney, settlement can be structured in a way that will benefit all parties.
A custodial parent is allowed to claim a dependency exemption, which is a predetermined amount per child. However, the custodial parent may give consent for the non-custodial parent to claim this exemption. There are specific IRS forms to be filled out by the custodial parent to confirm his or her consent. These release forms have to be attached to the non-custodial parent's tax return. Even if the custodial parent releases the dependency exemption, he or she may still be put in a lower bracket of tax liability by filing under the Head of Household status.
Additional benefits that the parent with custody may qualify for include Child Care Credit, Earned Income Credit, and Exclusion for Child Care Benefits. It is not uncommon for a non-custodial parent to claim dependency exemption without prior consent of the custodial parent, and resolving this afterward may be tricky. To avoid that, it is recommended that the custodial parent who wants to claim the exemption does not delay filing his or her tax return. If a second claim is submitted, it will be rejected by the IRS.
Child support has no impact on taxes, as it is not classified as taxable income to the parent receiving it, and it is not deductible to the paying parent. However, alimony or spousal support is regarded as income and subject to normal tax rates, and the person who pays alimony may record the payment as a deductible expense. There are specific rules to comply with, as the IRS will compare the respective income and expense recorded by the two parties. In fact, all these elements may be best discussed with an experienced professional to ensure proper procedures are followed. Our Pennsylvania divorce website may provide additional information on tax rules for divorce.
Source: Fox Business, "Taxes and Divorce, What You Need to Know", Bonnie Lee, Dec. 16, 2014