Divorce can be stressful for any couple, however the process can be even more complicated for those with a large number of assets. In these cases, there can be concerns about how best to split the couple’s wealth so that each person can move on to a new life.
This time of year, many California residents are concerned about taxes — whether or not they are divorcing. Tax season adds another layer of consideration for couples going through a high asset divorce.
In particular, one concern is about exemptions for children. Under federal tax law, parents get to deduct a certain amount of income per child, per year from their taxes. Like many other valuable assets, this exemption must be split during a divorce.
Under federal tax law, the custodial parent is entitled to take the exemption, unless a different arrangement is made between the couple. For tax purposes, the custodial parent is the parent that had the most overnights with the child for the year.
However, the IRS will honor agreements between the couple. Therefore, divorcing spouses can agree to split the exemption in a variety of creative ways. They can choose to split their children — where one ex-spouse takes the exemption for some of the children and the other ex-spouse takes the rest. Or, couples can choose to split years — where on odd years one spouse takes the exemption then they switch and so on. The IRS does require appropriate documentation in order to honor these sorts of arrangements.
Tax exemptions are just one of the many consideration that high asset couples should consider before finalizing their divorce. Couples need to make sure they understand all the decisions that need to be made and the financial ramifications of the divorce.
Source: The Huffington Post, “Children of Divorce: Who Gets the Tax Exemption?,” Stann Givens, March 13, 2014