The tax-related issues that arise in a divorce situation are extremely complicated, especially where corporations, retirement funds or children are concerned.
Corporations whose owners are engaged in divorce proceedings present particular problems when it comes to the tax consequences involved. The disposition of marital estates will include moving assets out of the corporate entity and dividing them between the spouses. Should this be the case, your lawyer may recommend the inclusion of a financial specialist as part of your team.
Retirement accounts also present tax liabilities and consequences if the individuals involved intend to include withdrawal of those funds in their settlement. The summary of the marital estate must reflect any expected tax liability and the tax consequences will need to be evaluated. Tax consequences also apply if one or the other of the parties anticipates the receipt of retirement monies. These consequences should be ascertained in order for your attorney to allay any uncertainty concerning the withdrawal of said funds. An accord between the spouses, the facts of the case or a court decision can all be determining factors as to the inclusion or non-inclusion of the effect of those taxes in the marital estate.
When children are involved, a family lawyer will often need to prepare parents for tax consequences stemming from the exemptions, credits for child and daycare taxes, and credit for any earned income related to their children.
Claiming Tax Credits and Exemptions
Your family lawyer can help to determine which parent claims the exemptions and tax credits for the children by making the determination part of the divorce decree or by submitting an IRS Form 8332. The parent who has devoted more than half of the time raising the children is usually permitted the credits for daycare tax and earned income. The individuals involved do not decide who receives these credits.
Further, the divorce proceedings will alter tax filing designations of the couple such as Single, Head of Household, Married or Married Filing Separately. This may occur either before the divorce is concluded or after the proceedings have ended. Changes in filing status may be taken into account as part of the budget, while the effects of the exemptions may be considered as bargaining issues in the negotiation.
Not a Parenting Decision
Conducting negotiations concerning tax exemptions does not make the children part of the divorce proceedings. Instead, decisions as to the designation of tax exemptions are financial rather than parental in nature. By constructing a well-thought-out parenting plan in advance, parents can identify possible tax consequences of child support, while daycare and earned income credits are more associated with time spent in actual parenting activities. However, caring for the children must be kept separate from any applicable tax consequences.