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Divorce, exemptions and credits


Dear Tax Talk,
Please help! I need some tax advice relating to my wife's petition for divorce. I have tried everything to avoid the divorce, but my efforts have been unsuccessful. With that, I work and make approximately $60,000 per year. My wife is disabled and draws $584 monthly (SSA or SSI, not sure). To my knowledge, the $584 per month is the maximum she can draw.

We also have three children together, ages 7, 4 and 3. We recently settled a child support agreement where she will receive $1,184 from me monthly. In that agreement, the court figured minimum wage for her in the calculation (Kentucky). She was previously supplementing her income by performing child care in the home and her total monthly income was approximately $1,100. I chose to use the minimum wage calculation with hopes that she and her attorney would agree to allow me to claim our three children as tax exemptions. They agreed, but only for this calendar year.

Her attorney argues that, beginning in 2005, she will qualify for the Earned Income Credit and won't allow me to claim all three children. To my knowledge, she doesn't qualify for the EIC unless she acquires taxable earned income. If this is correct, I feel that the child support figures need to be revisited to reach a fair settlement. I don't think the disability she draws qualifies as earned income. It is my impression that she intends to get a job, which will allow her to continue to receive disability and earn taxable income under the limitations of her disability guidelines. Can you give advice on my situation? If not, is there a financial planning group that could help me make the appropriate decisions relating to this issue? I can provide more details if needed. -- Tim

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Dear Tim,
If you're not the custodial parent, then you need your wife's consent to claim the children on your taxes. Since the attorney is using this as a point of leverage, you're going to have to come up with something better.

You're right in that the Social Security disability does not qualify as earned income for purposes of the earned income tax credit, so she'll need to work in order to claim the credit. Under SSA disability, she can earn about $800 a month without affecting her benefits. This would allow her to get some EIC. At that level of income she can get about $3,000 in EIC. Coincidentally, this is the same amount that you would get in child tax credit, but since you would also be claiming about $9,000 more in dependency exemptions, you have to look at how much this will save you on your taxes. If you agree to provide some compensation to your ex-wife, I'm sure you can probably come up with a solution that works best for both.

Additionally, her EIC is the same if she has two or three dependency exemptions, and is only about $500 more by claiming two children instead of one. Although the agreement may say she can claim the children, she can release one or more of the exemptions annually by completing Form 8332.

I don't know if you've given consideration to allocating some of the child support as alimony. Alimony is deductible, whereas child support is not. Of course, alimony also differs economically for both parties. An alimony obligation cannot be tied into the age of your children whereas child support usually is. Additionally, alimony terminates with the death of the recipient spouse. However, since the children are young, it may make more sense to try to allocate some of the payment as alimony.

-- Posted: Nov. 24, 2004




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