Claiming The Kids On Your Taxes

One of the issues that arises in divorce, no matter what tax bracket you are in, is who is going to get to claim the kids on their taxes. The person paying child support believes that they should be entitled to that deduction and the person who is the primary residential parent for the child also believes they are entitled to that deduction. Who is right? Well, according to Federal Law, the person who is designated as the primary parent, or the person with whom the children primarily reside, is allowed the dependency exemption. However, this is always subject to negotiation, and more often than not, the parties agree to alternate the deduction on an every other year basis. This is always used as a negotiation tool and can be used as leverage for other things that you may want in the divorce. Before you stall the divorce process because you want the dependency exemption and your spouse is refusing to give it up, you may want to see whether the exemption is actually going to be beneficial to you or not. The following blog from a Pennsylvania Family Law website explains how the exemption and the child tax credit works. However, as in any major financial decision, you should consult with a financial planner or CPA before agreeing to waive any right to a dependency exemption.
http://pafamilylaw.foxrothschild.com/2008/01/articles/support/should-i-fight-to-claim-the-kids-on-my-tax-return/

Are My Alimony Payments Taxable?

I recently received a phone call from an individual wondering whether alimony payments are taxable when there is no language in the Marital Settlement Agreement that states that the payments are to be taxable to the recipient. If you are having questions about whether your alimony payments are taxable or whether you can deduct the payments you make from your gross income, I suggest you speak with independent tax counsel who may be better versed in this area. However, if you are wondering what the rule is with respect to whether or not your alimony is taxable, I have the following information for you.

Rykiel v. Rykiel, 838 So.2d 508 (Fla. 2003). This case stated that gross income is taxable and that gross income includes alimony, therefore, alimony is taxable. Alimony is defined as "monetary payments made to a spouse pursuant to a divorce instrument, unless that instrument says that the payments are not includible in gross income and not allowable as a deduction". Further, it stated that if a divorce instrument stated the payments are not deductible and not includible in gross income, then the payments are not alimony and not included in gross income.

The usual treatment of alimony is for it to be taxable to the recipient and deductible to the payor. Based on the Rykiel case above, it seems absent language stating that the payments are not taxable or deductible, any payments received pursuant to a divorce instrument will be considered alimony and therefore taxable to the recipient. Therefore, it seems that if you are trying to avoid a tax liability on your alimony payments, you must specifically spell out that the payments are not taxable or deductible.

If any of my readers is an expert on this subject and has a different interpretation of the law, I welcome any comments or clarifications on this issue.