Ciyou & Dixon, P.C. advocates sometime observe litigants lose sight of the fact that a divorce, where children are involved, is a complex financial transaction impacting matters ranging from life insurance to unanticipated tax consequences.
One significant issue is which parent can deduct the child(ren) on his or her taxes and how often (e.g. every other year, each year?). Until recently, the subject was addressed by Indiana caselaw, but now there is a new statute that provides more understanding about tax exemptions and how they are allocated, at least if the trial court decides the matter in the absence of an agreement by the parties it approves.
Understanding this area of the law will help you help your attorney better plan for life after divorce or child support modification. The child’s tax exemption, may in real terms, impact how much money is your wallet or purse come tax time.
With caselaw, the Indiana Court of Appeals has handed down a number of cases on point as to the minor dependent exemption to provide guidance to its trial courts. These cases set forth factors for a trial court to use to determine in making the discretionary call about which parent will receive the tax exemption(s).
Some of these variables the trial court can consider to make its findings to make the award include the following:
- The value of the exemption at the marginal tax rate of each parent (effectively the highest tax rate a party pays tax at based on annual earnings).
- The income of each parent.
- The age of the children and how long the exemption will be available.
- The percentage of the cost of supporting the child(ren) borne by each parent. (Cross v. Cross, 891 N.E.2d 635, 644 (Ind.Ct.App.2008)).
If you think about it, this is logical since the parent earning more income generally provides more financial resources for the children and would benefit most by the exemption. These variables thus generally examine the costs and financial burdens of the parents relative to their tax rate, along with the actual benefit based on the child’s age.
For example, in making this determination, a trial court may well take a different approach in its discretion in dividing a tax exemption for a child who is two (2) versus seventeen (17) years of age. The time the exceptions are available (and the number of children) can have significantly more impact for the parents as evidenced by this example.
More recently, the Indiana General Assembly codified the factors Indiana’s trial court judges are to consider with respect to the tax exemption for children, providing further factors for the court to consider in determining which parent receives the tax exemption. Generally, this follows the custodial parent as a statutory matter.
These include, for example, the financial aid benefit for post-secondary education for the child(ren) and the financial burden each parent assumed under the property settlement in a dissolution proceeding, if applicable (Ind.Code § 31-16-6-1.5).
Notably, the last factor the court may consider when determining which parent may claim a child as a dependent under the statute is “any other relevant factors”. Therefore, the court has wide discretion to consider the information (evidence) and determine the parent to receive tax exemption.
A minor dependent tax exemption can be financially helpful to a struggling parent who spends the majority of overnights per year with his or her child and is responsible for controlled expenses, those day-to-day needs of children. Therefore, the court being allowed to consider a number of relevant factors can allow a case by case analysis of the best interests of the child(ren) and a solution that works for the parents, as well.
Ultimately, if both parties are able to effectively communicate and can create their own agreement, the parents can agree to alternate fairly or even evaluate each year to see which parent would benefit most from the exemption in any given tax year. This is another reason keeping the lines of communication open, if possible, can be helpful to both parties and the child(ren) post divorce.
Tax exemptions are multi-dimensional in that they often involve issues of both general tax we all face in ordinary life plus divorce case and statutory law. If tax exemptions are an issue either through divorce, modification, or in a paternity case, consult with counsel about working with your tax advisor to determine best options for both the child and the parents.
We hope you find this information useful in your education about family law. Ciyou & Dixon, P.C. attorneys practice throughout the State of Indiana. Nothing in this general blog post should be taken as legal advice. Ciyou & Dixon, P.C. does not offer tax advice. This blog post is written by Bryan L. Ciyou, esq. and Jessica Keyes.