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you can cite to that stands for this proposition – specifically, Zeitlin v. Zeitlin, which is Judge Jones’ unreported (non-precedential) opinion dated December 19, 2014 that was released on or about May 25, 2015.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>

 

 

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.

April 17, 2012 is the 2011 tax filing deadline and it’s quickly approaching. The Government does not care that you are going through potentially the most difficult time period in your life. Like the Godfather, the IRS wants its money. It does not want to hear excuses. It does not want to hear that you always filed jointly and now your soon-to-be ex-spouse will not sign the joint return, or provide their W-2, or disclose the income of the closely held business because they fear it will be used against them in the divorce process.

Filing your taxes can be difficult, especially if you owe money. Trying to file when going through a divorce can be especially difficult. That is why it is important to work with your attorney and a tax professional. There are many decisions to make when filing taxes during a divorce. First, you have to determine your filing status: married filing jointly, married filing separately, or head of household. If you decide to file jointly, make sure to be extra diligent. If your spouse prepares the returns, have your own tax professional review them to ensure that they are accurate. The IRS does not care that your spouse prepared or filed the taxes. If you sign the return, you can be held liable for misreporting.

If you decide to file married filing separately or head of household (if you qualify), the following determinations have to be made (and in some instances negotiated):

1. Who gets the mortgage interest deduction(s) and other itemized deductions?

2. Who gets to claim the child(ren)?

3. Can I deduct the temporary support?

4. Can I deduct my legal expenses for the temporary support?

5. Who gets to claim the Child Tax credit and the Household and Dependent Care credit?

Continue Reading Filing Your Taxes During a Divorce: What to do?

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. 

As April 15h quickly approaches and the pressure to get those tax returns completed and filed grows, the issue of which parent can claim a child or children as a dependency deduction for tax purposes becomes more and more relevant.

All Property Settlement Agreements ("PSA") or Final Judgments of Divorce should address this issue to avoid future complications.  What about when the issue is appropriately addressed but one parent seeks to modify the terms so as to receive a benefit  perhaps previously given up in lieu of some other benefit?

Recently, the Appellate Division heard the matter of Mitchell v. Mitchell, A-4856-07T1, decided March 11, 2009 (unpublished decision).  In this case, the parties have been divorced since 2002 resolving their issues by entering into a negotiated Property Settlement Agreement.  At the time of the divorce, husband was earning over $100,000 and wife was imputed income of $17,000.  The two children were given as tax exemptions to the husband but resided primarily with the wife.

Both parties remarried.  In 2008, wife filed a motion seeking, among other things, to amend the terms of the parties’ PSA to allow each party to claim one child as a dependency deduction on their tax returns.  Her argument was based on the fact that husband now had twins with his current spouse and would receive that tax benefit.  The trial court granted this request stating that there had been "numerous changes in circumstances" since the parties entered into the agreement and that such a request was "fair".

The Appellate Division vacated and remanded this aspect of the trial court’s Order.  In doing so, it noted that husband didn’t argue that the trial court was powerless to change or modify the terms of the PSA but rather that the judge’s conclusory determination of what was "fair" was insufficient to support the Order.  The Appellate Division agreed stating that the "record does not disclose the tax effect if one of the child tax exemptions was taken from" the husband.  Id. at pg. 6.  The court must ascertain whether its fair and equitable to take from husband a right for which he had previously bargained and which  may need to be determined with an evidentiary hearing.

In 2008, the IRS amended Section 152(e), which deals with dependency exemptions.  The changes to the tax code can be summarized as follows:

The custodial parent, for 2009 and forward, is the one with whom the child resides the greater number of nights during the year, regardless of the terms of the divorce decree. 

 The custodial parent can unilaterally revoke the release of a child exemption for calendar years 2009 and forward, even if the release was made prior to 2009.  As a result, it is important to make sure that there is a procedure in place to have the custodial parent file IRS form 8332 in a timely manner so that the non-custodial parent can claim the exemption that they are entitled to claim by reason of the parties’ agreement or a Court Order. Put another way, the change in the IRS section does not preclude a non-custodial parent from claiming the exemption, it just requires more care to make sure that this is accomplished.

As a further note, the individual claiming a dependency exemption is entitled to benefit from a Child Tax Credit and any allowable Hope and/or Lifetime Learning Educational Tax Credits.

 

For more information on the tax benefits/ramifications of these issues, you should consult a tax professional.