Johnny Depp a.k.a. Capt. Jack Sparrow is in the news again, this time for his failure to pay Amber Heard a $7 million divorce settlement. Heard had promised that any settlement that she received from Depp would be donated to charity. She has chosen two charities, the American Civil Liberties Union and the Children’s Hospital of Los Angeles to be the beneficiaries of her largess. Depp hasn’t made the payout yet because he wants to pay directly to the charities rather than to Heard. At issue is the substantial tax benefits that Depp would reap by making the payments directly to charities rather than Heard.

Johnny Depp in Capt. Jack Sparrow costume
By NJM2010 (Own work) [CC0], via Wikimedia Commons
Tax consequences of divorce disbursements is an important consideration when negotiating a settlement. Often times the client will simply lump all assets together and come up with a value of the marital estate not taking into consideration possible tax issues for each individual asset. For instance, the average couple may have a house with $250,000 of equity, a 401(k) with $500,000, and various bank accounts equal to $250,000. The easy math would suggest that one spouse take the 401(k) and the other take the accounts and the house, right? Not so fast. The spouse who would walk away with the house and the bank accounts could liquidate everything and have $500,000 to spend now. The spouse with the 401(k), however, has significantly less available liquidity. Assume, for example, that the spouse that takes the 401(k) has an overall 30% tax bracket for state and federal taxes. To liquidate the 401(k), that spouse would have to pay not only 30% in taxes, but absent extraordinary circumstances, a 10% penalty to liquidate the retirement early. All too quickly that $500,000 becomes $315,000.

This simplistic example demonstrates the necessity of understanding tax consequences to all of the assets in a divorce. This includes stocks and bonds that may have been purchased at a low price that have gone up substantially in value, retirement accounts, real estate investments which in and of themselves may have tax consequences such as available deductions, and carry forward losses on prior tax returns. In the rush to settle the case, litigants sometimes forget the importance of the careful review of their prior tax returns and asset portfolio. A quick call to your accountant may assist your attorney in protecting your future significantly.

 

MillnerJennifer_twitterJennifer Weisberg Millner is a partner in Fox Rothschild LLP’s Family Law Practice Group. Jennifer is resident in the firm’s Princeton Office, although she practices throughout the state. Jennifer can be reached at 609-895-7612 or jmillner@foxrothschild.com.

One of the issues to resolve in a divorce cases is the allocation of the dependency exemptions. While the IRS says that they should go to the custodial parent, by and large, states, including New Jersey feel that they can allocate the exemptions between parents and there is case law to that affect.

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In most cases, there is either the blind division/alternation or the unnecessary, if not absurd, fights about the allocation of the dependency, often because no one has taken the time to see what they are really worth to the parties.  The high six or seven figure earner demanding the exemptions when he or she gets absolutely or virtually no benefit from the exemption, or worse yet, the other parent who would get a real benefit not fighting for it the cases.  High income earners phase out of the benefit of exemptions under the IRS code but that doesn’t stop them from fighting for them and/or from the court automatically dividing or alternating them.  I have seen this occur even when we have demonstrated the lack of benefit.

That said, should you be entitled to claim the exemption if you have not paid all of your child support during the year?  Many people would argue no. There is finally a case that you can cite to that stands for this proposition – specifically, Zeitlin v. Zeitlin, which is Judge Jones’ unreported (non-precedential) opinion dated December 19, 2014 that was released on or about May 25, 2015.  The Judge gave three reasons why the court may suspend a payer’s right to claim a child dependency exemption if there are child support arrears which remain unpaid at year’s end.  This was the case even though parties’ settlement agreement does not explicitly contain a provision “… directly conditioning the child dependency exemptions upon his concurrent duty to stay current on his child support obligation.”  This author thinks that this should be implicit in any event.

The court agrees and that was first reason given.  Judge Jones noted:

First, even though the parties’ settlement agreement does not expressly state same, the court finds that there is logically an implicit relationship between the child dependency exemption and the parental child support obligation. In this case, defendant’s right to claim a child dependency exemption is inherently and equitably intertwined with his duty to pay child support. The concept of a non-custodial parent receiving a child dependency exemption is generally based on the presumption that such parent is in fact financially supporting the dependent child or children, in a manner mandated under a court order or otherwise agreed by the parties. If, in such a case, the non-custodial parent breaches the child support order and accumulates substantial unpaid arrears, then the very foundation for that parent’s right to share in the tax exemptions collapses. For this reason, even when a divorce settlement agreement contains no language directly linking the non-custodial parent’s right to claim the tax exemption to faithful payment of an existing child support obligation, then absent clear evidence to the contrary, a court of equity may infer the natural existence of such a relationship of common sense and fundamental fairness.

…Hence, logic compels the conclusion of an equitable connection between the provisions. If this were not the case, then defendant could simply continue to accrue significant additional arrears, leaving plaintiff to essentially support the children by herself while defendant receives an annual tax break for her efforts. Such a result would be not only inequitable, but arguably unconscionable as well.

 The second reason given was that the accrual of arrears is a change of circumstance … “warranting equitable relief, since plaintiff is now deprived of over ten thousand dollars in support funds which she was entitled to receive and utilize in raising the parties’ children.”  It is interesting that the judge intertwined enforcement/failure to comply with a changed circumstances, as that often is not a winning argument when made by lawyers.

The third reason, which I think really would trump the second reasons, is that this could be a permissible and appropriate economic sanction for failure to pay support.  Judge Jones held:

A third legal basis supporting plaintiff’s motion to modify the tax exemptions rests in Rule 5:3-7(b), which permits a court to take action against a party who violates a child support order. Such action may include, but is not necessarily limited to, economic sanctions (R. 5:3-7(b)(4)), and any other appropriate equitable remedy (R. 5:3-7(b)(8)). The suspension of a delinquent payor’s right to claim a child dependency exemption, until he/she satisfies his court-ordered child support balance, constitutes an appropriate sanction and equitable remedy under sections 4 and 8 of Rule 5:3-7(b).

The judge did point out that the mere existence of arrears should not automatically invalidate the agreed upon right to claim the exemption.  The judge noted that if the arrears were not due to a failure to comply with an order, but rather, from a retroactive award or adjustment of child support or some other “technical adjustment”, it might not be fair to take away the right to claim the exemption.  Put another way, if the arrears were no fault of the payor, then the exemption probably shouldn’t be taken away.

While much of this may be common sense, the relief was not universally granted in my experience.  This opinion, at least, gives greater credibility to the argument.

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Eric SolotoffEric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Roseland and Morristown, New Jersey offices though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com. Connect with Eric: Twitter_64 Linkedin

Photo credit:  Copyright: <a href=’http://www.123rf.com/profile_mybaitshop’>mybaitshop / 123RF Stock Photo</a>

 

 

April 15th is bearing down on us, and as divorced and separated parents get ready to file tax returns, the question of the dependency exemptions comes up.  According to IRS rules, only one taxpayer may claim a dependency exemption for a child for a tax year. Two parents cannot split this dependency exemption.

Copyright:  / 123RF Stock Photo
Copyright: / 123RF Stock Photo

Generally, the child is the qualifying child of the custodial parent.  In other words, the parent who cares for the child and has the child over 50% of the time is entitled to claim a child as a dependent on his or her tax return as a matter of right.

The practical answer, however, is that the dependency exemption is a typically the subject of negotiations, particularly if there is more than one child. Many times, as long as the non-custodial parent is paying child support, the exemption is split between children, or if there is only one child, alternated year to year.

One exception that should be considered is in situations in which one parent is in a tax bracket ( high or low) that the exemption does not make a significant difference.  In that case, the parent who gets a significant savings may want to have the exemption in all years.

Moreover, one condition that a custodial parent may want to consider when giving the exemption to the non-custodial parent is that the payor must be current on child support obligations in order to claim the child(ren).

In the event the custodial parent does allow the other parent to claim a child, two conditions must be met:

The custodial parent signs IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a substantially similar statement, and

  • The noncustodial parent attaches the Form 8332 or the statement to his or her return.

When negotiating support for a child, a consultation with counsel and an accountant is important to maximize dependency exemptions.

 

Jennifer Weisberg MillnerJennifer Weisberg Millner is a partner in Fox Rothschild LLP’s Family Law Practice Group. Jennifer is resident in the firm’s Princeton Office, although she practices throughout the state. Jennifer can be reached at 609-895-7612 or jmillner@foxrothschild.com.

What do divorce and economics have in common?  Well, a lot. But today I am focusing on the unlikely link between the theory of information asymmetry – which deals with the study of decisions in transactions where one party has more or better information than the other – and the New Jersey Divorce App.

Smartphone Info  (photo courtesy of freedigitalphotos.net)

According to the acclaimed book, Freakonomics, the theory of information asymmetry accounts for why we hire a real estate to sell our house, an insurance broker to purchase long-term health insurance, and a funeral director to purchase a coffin for a loved one that has passed.

So what does the information asymmetry have to do with divorce, you ask?  Well, typically, when getting divorce, you hire an expert – a divorce lawyer – to handle your case.  After all, we are well-versed on all things divorce, custody, alimony, child support, equitable distribution, tax issues, and many other issues with which you may not be familiar.

In other words, the divorce lawyer has an information asymmetry that the client seeks to tap into to achieve the best result possible.

But what if you could bridge the gap between the lawyer’s vast knowledge and your own?  Would you achieve a better result if you could actively participate in the process?

Possibly.

Just like studying up on the housing market may assist the person selling or buying their house when working with a real estate agent, having more information as a litigant during the divorce process may help you inform your attorney as to the issues in your case.

That is where the New Jersey Divorce App can help tremendously.  It is designed specifically for the client.  It takes information regarding the divorce process, synthesizes it, and presents it to the client in a way that they can easily understand.

For example, when you download the app, you will see a section called “Divorce Information,” which covers the following topics:

  • Overview of the Divorce Process;
  • Custody;
  • Child Support;
  • Alimony; and
  • Equitable Distribution.

Click on these larger topic headings, and you will get to a myriad of subtopics; many of which will pertain to your specific case.  This section is a great compliment to the Finance Tracker and Asset Identifier, which allow you to interface with your attorney like never before.

So just like you would not buy or sell a house without doing a little research, don’t go into your divorce without making that information asymmetry a little less asymmetrical.

For more information and to download the New Jersey Divorce App, click here.

______________________________________________________________________________ Eliana T. Baer is a frequent contributor to the New Jersey Family Legal Blog and a member of the Family Law Practice Group of Fox Rothschild LLP. Eliana practices in Fox Rothschild’s Princeton, New Jersey office and focuses her state-wide practice on representing clients on issues relating to divorce, equitable distribution, support, custody, adoption, domestic violence, premarital agreements and Appellate Practice. You can reach Eliana at (609) 895-3344, or etbaer@foxrothschild.com.

Oftentimes I hear from clients that gathering their financial information is the most daunting task they will face during the divorce process. They picture being buried in an avalanche of documents, account numbers and canceled checks.

The New Jersey Divorce App’s Finance Tracker can help.  In fact, I have recommended it to my clients before, with great results.

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The Finance Tracker is designed to help you focus in on the necessary information that you will need throughout the divorce process.

It is split up into 4 categories:

Income

Assets – like your house, car, bank accounts, retirement accounts, etc.

Expenses

Liabilities

Each section is then split into subcategories, which allows you to categorize the information in a way that makes sense.

Here is the best part: you can send the information directly to your attorney – straight from the app!

While the divorce process can be overwhelming at times, the New Jersey Divorce App, along with its Finance Tracker and other great features make things a little bit more manageable.

For more information and to download the New Jersey Divorce App, click here.

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Eliana T. Baer is a frequent contributor to the New Jersey Family Legal Blog and a member of the Family Law Practice Group of Fox Rothschild LLP. Eliana practices in Fox Rothschild’s Princeton, New Jersey office and focuses her state-wide practice on representing clients on issues relating to divorce, equitable distribution, support, custody, adoption, domestic violence, premarital agreements and Appellate Practice. You can reach Eliana at (609) 895-3344, or etbaer@foxrothschild.com.

Matt Levitsky, an associate in our Montgomery County, Pennsylvania office wrote a guest blog for our fir’s Pennsylvania Family Law Blog entitled "Who Gets to Claim the child if there is 50/50 Custody?"

Matt’s post talks about the four prong test and the fact that at the end of the day, all other things being equal, the exemption would normally go to the parent with the higher adjusted gross income (AGI).  The piece also has an interesting discussion on whether a step-parent’s income is included in the AGI test.  I note that Sandra Fava has previously addressed the issue of the allocation of the dependency exemptions, in general, on this blog.

While this is an interesting technical discussion, often it does not come into play in post-divorce scenarios in New Jersey because, either the parties agree upon the allocation of exemptions (most often, blindly alternating it if there is an odd number of children or splitting them if there is an even number of children – whether this makes sense or not will be the subject of another blog post in the future) or a judge will simply allocate the exemptions in a similar fashion, regardless of what the IRS code would provide. 

In any event, Matt’s post was interesting reading and provides some guidance about what the proper result is when there is no agreement of the parties or decision by a court.

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Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric practices in Fox Rothschild’s Roseland, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com.

As tax day is around the corner, Mark Ashton, a partner in our Exton, Pennsylvania office, and a contributor the firm’s Pennsylvania Family Law blog, wrote a timely post on that blog entitled "Tax Time."

In that article, Mark discusses tax deductions, tax credits and joint tax returns. 

I have previously blogged about the issue of innocent spouse relief and how the form has traps for the unwary.  Another point to make is that while the signing of indemnification agreements, allocating responsibility for information, taxes, etc. is common during a divorce, they are only enforceable as between the parties and are not binding on the IRS. 

During tax season this past Spring, we posted blog entry entitled "Who Gets The Tax Exemption".  This past month in a Chief Counsel Advice (CCA), the IRS has clarified the provisions in the IRS Code relating to exemptions which were discussed in our blog.  CCA 200925041 cautions that a Final Judgment of Divorce awarding one party a dependency exemption may not be upheld by the IRS if the Judgment awarding the dependency exemption contains contingencies.  

In our prior blog, we discussed the recently amended IRS code, Section 152(e) relating to tax exemptions.  Section 152(e) directs, for exemption purposes, that the custodial parent is the one with whom the child resides the greater number of nights during the year regardless of the terms of a divorce decree.  However, Section 152(e) does not preclude the non-custodial parent from claiming the exemption so long a the custodial parent executes IRS Form 8332 releasing the exemption.  Sandra Fava, the scrivener of the blog, noted that it is important to make sure that there is a procedure in place to have the custodial parent file IRS Form 8332 so that the non-custodial parent will be able to claim the exemption.  CCA 200925041 clarifies the procedure in effectuating the exemption through execution of Form 8332 and further recommends additional procedures in order for the non-custodial parent to exercise his or her right to claim the exemption..

CCA 200925041 clarifies that (1) for pre-July 3, 2008 divorce decrees or separation agreements allowing a non-custodial parent to claim an exemption for a child, a non-custodial parent may attach pages of a divorce decree or separation instrument executed on or before July 2, 2008 if the pages constitute a statement substantially similar to the requirements of Form 8332 in effect at the time of the entry of the decree or separation agreement; and (2) for post-July 3, 2008 divorce decrees or separation agreements, a custodial parent’s release of a claim to an exemption for a child must be separate from the decree or separation agreement.  The release of the exemption my be pursuant to a signed Form 8332 or a document that conforms to the substance of Form 8332 but the document’s only purpose must be to release a claim to the exemption. 

Also very important is that CCA 200925041 specifically noted that for pre-July 3, 2008 divorce decrees or separation agreements, while in order to obtain the exemption the non-custodial parent may attach pages of a divorce decree or separation instrument executed on or before July 2, 2008, the provisions to the divorce decree or separation agreement must not contain any conditions on claiming the exemption.  For example, parties often agree that one party may claim an exemption so long as his or her child support obligation is current.  If this type of provision is contained in the divorce decree or the separation agreement, regardless of whether the condition is satisfied, a non-custodial parent will be unable to claim the exemption simply by attaching copies of the decree or separation agreement as has been the practice in the past.

Accordingly, it is important to do the following:  (1) If you have a pre-July 3, 2008 divorce decree or settlement agreement that contains conditional requirements and you are the non-custodial parent, discuss with an attorney how to best protect your exemption right and any necessary modifications to your Judgment or your settlement agreement to effectuate your right;  and  (2) if you are currently separated or about to be separated and are heading to divorce, make sure that you address these issues with an attorney so that you can insure that there are no problems in the future with respect to the IRS and exemptions.