Category Archives: Taxes

It’s Tax Season Again

With the arrival of tax season, it is important that you take a few moments to consider the tax issues inherent to your dissolution case and/or Judgment for Dissolution.  In order to avoid common problems associated with filing your taxes during and after your dissolution, you should review the following:

1.         Your current Order or Judgment for spousal or family support.

2.         Your current Order or Judgment for child support.

3.         Bank records demonstrating amounts that you have paid or received for spousal support during the calendar year.

4.         Your current Order for child custody and visitation.

5.         Any correspondence or billing statements from your attorney indicating any amount or portion of your attorney’s fees and costs paid during the calendar year that pertained to:

a.         Income tax analysis, income tax advice, and income tax planning regarding your dissolution.

b.         Production (or enforcement) of income (spousal support).

c.         The acquisition and preservation of title to an asset.

After reviewing these records, you should note:

1.         Whether your spousal support Order indicates the payment of deductible or non-deductible/taxable or non-taxable spousal support.  If your Order contains provisions for a lump sum buy-out of spousal support you need to understand whether that amount is taxable or deductible.

2.         How much family or spousal support was ordered versus how much you actually received or paid.  If you received or paid an amount different from the payment specified in your Order, you should consult with your attorney.

3.         Whether your spouse’s calculation of the amount that he or she paid you or received from you for spousal or family support matches your calculation.  You may trigger an audit if the amounts claimed by each party do not match.

4.         Which party is entitled to claim any children as dependents.

5.         Whether you are eligible under your custody schedule to claim Head of Household status.  Again, it is a good idea to verify with your spouse/former spouse which of you intends to claim Head of Household in order to avoid unnecessarily triggering an audit.

If you have any questions regarding your support and/or custody Orders, you should consult with a CPA or tax attorney before filing your returns.  If you have your tax returns professionally prepared, you should gather the above-referenced information and/or records to take to your tax professional.  If you prepare your own taxes, you should consult the appropriate sources to determine how to properly present this information on your returns.

The fiscal cliff deal and its impact on child support and spousal support

The amount of taxes an individual pays is one of the significant factors impacting the amount of support paid.   As a result of the fiscal cliff deal, aka the “American Taxpayer Relief Act of 2012” (“The Act”),  a high earner who pays support under an existing support obligation may be paying too much in support if the support order was made before December 31, 2012.

In general, higher taxes will reduce a payor’s support obligation, but tax deductions including breaks tax payers receive for mortgage interest, property tax and charitable contributions increase a payor’s support obligation.   The concept here is that if a person receives some tax break, he or she has more net spendable income (i.e. less money goes to taxes and more money is in her or his pocket) to pay support.

Under The Act, higher earners will be in higher tax brackets, plus they may lose some value in their itemized deductions as a result of the re-emergence of the “Pease Limitation,” which is a limitation on itemized deductions.  Pease was phased out years ago — but now is back in play with The Act.  This limit kicks in and begins limiting itemized deductions once an individual’s gross income hits the “applicable amount.”   The “applicable amount” for single filers is $250,000 and for joint filers it is $300,000.  All income over the “applicable amount” reduces your tax deduction by 3%.  For example if you file as an individual and declare an adjusted gross income of $500,000, then you are $250,000 over your “applicable amount” which means you lose 3% of $250,000 – or $7,500 of your total itemized deductions.  In other words, that $7,500 is no longer sheltered from taxes and if your support order was created prior to December 31, 2012, the calculation used most likely is incorrect – i.e. the calculation incorrectly assumes that the $7,500 is sheltered from taxes – and hence the support order is too high.

There’s more.  In addition to the Pease Limitation, The Act restores prior Personal Exemption Phase-Outs (“PEP”).  Under PEP, individuals with adjusted gross incomes over the “applicable amount” can no longer claim their full personal exemption.  For 2012, the personal exemption was $3,800.  Under The Act, for every $2,500 an individual’s income surpasses the “applicable amount”, then the individual’s exemption is reduced by 2%.  For higher earning individuals who pay support, this phase out means greater taxes which mean a pre-existing support order is probably too high.

Of course, the Pease limitation and PEP phase-out apply to all tax payers, including not only parties paying support, but parties receiving support.  The tax effects of the Act on BOTH parties must be reviewed to determine the correct level of support.