Claiming the Exemption in Multiple Support Situations
TAXATION ISSUES AT DIVORCE ARE CRUCIAL CONSIDERATIONS
Question (by e-mail): My estranged husband – age 55 – and I – age 52 – are in the midst of a marital controversy. As part of the court’s early settlement process, I met with my lawyer, my husband, his lawyer, and two other lawyers who made up the early settlement panel. There are two major assets to be divided: The $33,000 profit from the sale of our $150,000 house, and $35,000 from a profit sharing plan I contributed to during the course of our marriage. The panel said that they recommended a nearly equal division, suggesting that I keep the profit sharing plan and that my husband take the entire cash profit from the house. I told my lawyer that the value of the $35,000 profit sharing plan is worth significantly less than $33,000 liquid cash. Am I "off my rocker"?
Answer: No, you are correct. Assuming there are no capital gains due on the house sale – which depends on when the house was sold -- this is post-tax money. On the other hand, since the profit sharing plan is qualified money, if you decided to take it down to spend it, you would be hit with both income taxes and a 10 percent penalty since you have not attained age 59 and one-half. Based on what you report, the panel and your lawyer should consider the taxation issues as their suggestion gives you the short end of the stick.
Question (by e-mail): Our father’s lengthy illness -- which ended when he died in a nursing home -- caused emotional and economic devastation to our mother, now age 73. Because of her poor financial situation (her only income is Social Security of less than $500 each month), my two sisters and I have been providing monetary support, upkeep for her house, and other expenses for her. We have been talking about taking her as a dependent; however, since none of us provide more than half of her support, how can we take advantage of this tax break?
Answer: While it is generally correct that a taxpayer can claim the dependency exemption for an individual only if he or she provides more than half of that individual's support during the year, in multiple support situations such as yours, several taxpayers may provide support for an individual with no one person providing more than half the support.
In these circumstances, there is an exception to the general rule: If qualified taxpayers each provide more than 10% of an individual’s support – and 50% collectively among them -- they can decide among themselves who will claim the exemption so long as all tests are met. Although only one taxpayer can claim the exemption each year, the exemption can be switched among taxpayers on a year-to-year basis. Those eligible to claim the exemption must enter into a new agreement each year for one of them to claim the exemption.
First, you and your sisters must determine which of you is entitled to claim the exemption. If one of you did not provide 10% of the total household support for your mother, that person will not be eligible. Once you decide who will take the exemption, each of the others who have provided at least 10% of the support must complete and sign a Form 2120 which will be attached to the tax return of the person who claims the exemption. It is important to remember that in multiple support situations, the taxpayer claiming the dependency exemption can also deduct medical expenses that he pays for the person being claimed as a dependent.
We urge you to contact your certified public accountant or tax advisor to help you determine how you stand.
Question: My husband and I are dividing up our "marital pie" and have come to a sticking point about taxes. If I accept the way in which the settlement is being put together, I will incur capital gains taxes on a stock portfolio while he will get the house which I understand he can now sell without capital gains. I think I deserve some additional cash to make up for the difference. Do you have any suggestions about how we can resolve this as he only wants his way?
Answer: By keeping cool heads and getting good advice and guidance from your lawyers and tax professionals, you and your spouse should work toward making decisions during the divorce process that will equalize the asset division by considering the taxation effects of the assets each of you receive. You should consider not only the basis -- or cost -- or each asset distributed, but also the new tax rules that were enacted in 1997. By taking the time to look at these issues with open minds, you and your spouse should be able to reduce taxes and therefore create savings that will be worth the effort. Our advice: Stay calm, understand the rules, know your goals, and try to get there in a consistent, cooperative way. And remember that in all fairness, the spouse who receives a tax advantage should be willing to compensate the other for the burden he or she assumes.
SoloFact: "Divorce and Taxes: Practical Tax Planning For The Divorce Lawyer and Client" -- with updates that explain the new tax rules as they apply to divorce -- is an easy-to-understand 84-page publication that covers the tax aspects of everything from Alimony to Property Settlements to Personal Residence Issues to Family Businesses to IRA's and Retirement Plans to Estate Planning to Use of Trusts to Potential Problems with the IRS to such important miscellaneous issues as negotiating for the dependency exemption, premarital agreements, and the deductibility of legal fees. To receive your copy, send check for $17.95 to "Divorce Tax" to P.O.Box 11704, Columbia, South Carolina 29211, and we'll make sure you get it.
Jan Collins is an award-winning writer and editor. Jan Warner is a matrimonial, elder, and tax attorney. Both are based in Columbia, South Carolina. Flying Solo is seen in newspapers throughout the United States and can be found on the Internet at http://www.flyingsolo.com.
Please e-mail your questions to firstname.lastname@example.org or by mail to P.O.Box 11704, Columbia, SC 29211.
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