Tax Laws & Exemptions Relating To Children
The following is a transcript of an interview with Heidi Sherman and Jonathan Mishkin. They discuss recent changes to tax laws and their impact on deductions and exemptions related to children.
Heidi: Hi, I’m Heidi Sherman with Jill Brittle Family Law Group. And this morning, I have Jonathan Mishkin with me. He’s a tax attorney that manages his own law firm. Jonathan, I wanted to ask you some questions related to the tax code, and children of parties that are going through a separation or a divorce. Can you tell me about the changes in the tax code regarding deductions and exemptions related to children?
Jonathan: Sure. As you are aware, at the end of 2018, new law was signed called the Tax Cuts and Jobs Act. And what it did is it removed a lot of what I would call itemizable deductions in the Code. One of the changes to that was, it was the removal of what I would call the Formal Dependency Exemption, which used to be found in Section 152. It’s been replaced in a sense that you no longer get this exemption. But it’s been replaced with certain credits. It’s important because, you know, beginning in 2018, we now have a larger child tax credit, and additional child tax credit, and a credit for other dependents. We still have the Earned Income Tax Credit, dependent care credits. So, there’s a lot of reasons why you would still want to claim the child. And the way to claim the child is still fulfilling the dependency tests. So, think of it as the test still exists, but instead of getting a flat exemption, you now have to see if you qualify for certain credits.
Heidi: So, this is an issue that comes up a lot in my cases. And my client will say, for example, when we’re talking about child support, I want to be able to claim the dependency exemption. And my understanding is that exemption no longer exists for federal law. But you’re saying that there are other credits that are available if you claim the child?
Jonathan: Yes, because think of it as they removed the exemption, but replaced it with these credits. And the test is still the same. And what’s interesting is, and a couple things I want to mention to you: Oregon follows the Internal Revenue Code, there’s a statute where Oregon says, unless we literally pass a law that says contrary, presume the Internal Revenue Code plugs in. So, Oregon is following this change. But what’s great is, the Internal Revenue Service allows you to allocate this, what used to be the dependency exemption, per your divorce. The way the IRS sees it is, you have children, someone should be eligible for it, we just don’t want both spouses, ex-spouses claiming it. So, in my experience, if one spouse claims that they don’t check, because if they did, you would just show them the divorce decree, and they would say. If now let’s say both spouses file it, I’ve seen that in violation of their agreement. I’ve been in an audit where what the IRS does is they just send you reach a letter asking for proof. And my response was, we don’t need to show you that that child resides with them a certain amount of nights, we just have to show you a copy of the agreement. And in my last case of doing that the IRS said, well, the dependents exemption, or now the credits should have gone to the spouse who got it in the divorce decree.
Heidi: Okay, so that presumes that it is set forth in the in the judgment in the divorce decree, what if there’s nothing in the judgment about who gets that credit?
Jonathan: Then you would have to meet, you’d have to me what I call a support test. Essentially, it’s a relationship, it’s your child, it’s a son, a daughter, a foster child, a stepchild: they have to live in your residence for more than half the year. They’re under 19, or they’re under 24 and they’re, you know, off at college where it won’t count against you. For any age it they’re unfortunately disabled. The child cannot supply half of his or her support. And the child must not be filing some joint return. Essentially, you can’t claim a married child as your dependent. That would be the basic tests. So, if you can be claimed as a as a dependent, you then should start looking for then do I qualify for some of these additional tax credits?
Heidi: Okay. So, if you are a parent that is, let’s say receiving child support, however, you have the child left less than 50% of the time, in order to be able to claim the child as a dependent, you’d have to be able to meet all the various tests set forward to set forth in the Tax Code?
Jonathan: Otherwise, it would be rightfully claimed by the other spouse. Because, you know, it’s, I would say, it’s a mathematical seesaw equation. You have 365 days in a year, how many nights? Okay, you know, they literally won’t go into the days.
Heidi: Yeah. And it sounds like that the parties despite what the Tax Code says, the parties are able to make an agreement. That might be contrary to what the Tax Code would find, but the tax code will honor that or that the IRS will honor that, if the parties have a written agreement?
Jonathan: Think of it as they want to stay out of a divorce, they just want to make sure there’s no what some people call double-dipping. So, you know, like the IRS doesn’t want to get in the middle of your divorce. That’s why they make it tax free when you separate. But when it comes to any type of benefit, as long as they’re only seeing it on one, one person’s tax return, I’ve not really seen them follow up. It would have to be you were audited for a different reason. And then this might come up while you’d show them the agreement.
Heidi: So, when I’m negotiating this issue, you know, we will often try to negotiate who’s going to claim the kids and be entitled to these areas’ credits. Sometimes the parties can’t agree. Do you recommend that we include any specific language in a judgement if the parties can’t agree? What I generally have thought about doing is to actually put a statement in there that says, the parties will follow the provisions of the Tax Code regarding who can claim the children for as a dependent, so that both parties can see very clearly that they don’t have an agreement. And so, they have to follow the rules that are set forth in the tax code. Does that make any sense to you to do something like that?
Jonathan: What I do is sort of a derivative of that. What I do is I put indemnification, or I would suggest some form of indemnification clause that says: if either if we get audited as a result of an inconsistent, you know, position, basically what we’re talking about, you claim something and you shouldn’t, you’re going to cover my attorney’s fees and any costs associated with dealing with it. That’s what I usually tell people. Okay, because I mean, maybe the right answer is, it’s sort of an assumption that everyone should follow the Internal Revenue Code. So, I like to put in there the second part, which is well, what if I don’t? Well, you agree to cover all the costs that the other spouse has to deal with because they have to hire me now to respond to an audit at court. That usually stops that from happening.
Heidi: Yeah, thank you.