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In divorce, control your tax destiny; don’t let court decide

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in Small Business Tax

Frequently, a divorcing couple can't agree on which of them should claim the dependency exemptions for the children. If you can't decide, the court will do it for you. And that could yield the worst possible result for you.

Advice: Resolve all the key tax issues in the divorce agreement, including who claims the dependency exemption. And don't just look at the immediate tax impact; consider the future ramifications. It's best to involve a tax pro to avoid tax pitfalls. (Many divorce attorneys, frankly, don't know much about taxes.)

Who earns dependency exemption?

Here's the story: Normally, a parent who provides more than half the support of a minor child can claim the dependency exemption. But if parents are divorced, with no written agreement, the parent who maintains physical custody for
the greater part of the year is entitled to the dependency exemption.

In recent years, joint-custody arrangements have become more common. So who is entitled to the dependency exemption when custody is split down the middle? A new court ruling sheds some light.

Lesson from new court case: Their divorce judgment called for joint custody of the Dails' young son. The child resided with Mr. Dail from Monday morning to Thursday evening and with Mrs. Dail from Thursday evening through Monday morning. So the child's time was evenly split between the two parents.

But the child spent two weeks exclusively with Mrs. Dail in the summer when she visited her ailing mother. Those extra weeks were enough to tip the scales in Mrs. Dail's favor, according to the Tax Court. (Dail, TC Memo 2003-211)

Bottom line: You can't rely on a judge to show the wisdom of Solomon. In a split-custody situation, make sure the divorce agreement spells out which parent is entitled to the exemption.

If you're the noncustodial parent, you can still claim the dependency exemption. But make sure your ex-spouse waives her right to take the exemption by completing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents. Try to obtain your ex-spouse's signature on this form at the same time all the other divorce paperwork is signed.

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