Over
the years, courts and families alike have become more civilized and sensitized
to these issues, as dissolution agreements have attempted to craft solutions
that seem fair and equitable to all.
Unfortunately, fair and equitable sometimes doesn’t always work when
money is involved.
A
dissolution agreement that awards joint, physical custody and support
responsibilities to both parents can work against the children when it comes to
obtaining financial aid for college. If
both parents share these responsibilities, typically, the joint incomes and
assets of two separate households will be counted when the colleges compute the
Family Expected Contribution amount. This
effectively reduces the amount of aid available.
For
example, assume a situation where the non-custodial parent has a much higher
income than the custodial parent. Assume
the divorce agreement specifically excludes the higher income parent from any
responsibility for college support. As a
result the two children would qualify for financial aid based upon the much
lower income of the custodial parent.
This would result in more financial aid than would otherwise be
available if both incomes were used to calculate aid eligibility.
In a
recent tax court case, a divorced couple shared support and custody of their
one child. The IRS challenged their
respective tax returns on the basis that both parents claimed an exemption for
the child, claiming that each supplied one half of the support.
The
IRS denied the dependency exemption for both parents because neither could
prove that the child had spent the greater portion of the calendar year with
either.
The
divorce agreement provided for joint custody of their child, with physical
custody split equally between the parents on a weekly basis.
The
Code allows an individual taxpayer to deduct an exemption amount for a
“dependent” (i.e., an individual over half of whose support was received from
the taxpayer during the calendar year).
If a child’s parents are divorced, the child is in the custody of one or
both for the year, and the parents provide over one-half of the child’s
support, the custodial parent is treated as having provided over half of the
child’s support for the year and he/she may claim the exemption for the
year. However, in the case of “split
custody,” custody is treated as being with the parent who, as between both
parents, has physical custody of the child for the greater portion of the
calendar year.
In
this case, neither parent could prove to the Court’s satisfaction that that
parent had provided more than one half of the physical custody. Their documentation and testimony was not
convincing enough. In an understatement
of confusion, the Court noted it would be “sheer unguided guesswork” for the
court to find otherwise. As a result the
exemption was denied.
This
loss of taxable benefit could have been avoided if the parents had agreed to a
specific number of days, even to the extent of alternating years taking the
dependency exemptions. Another viable
alternative would be for the parties to bargain for a more generous settlement
that allows the other to claim the exemption every year.
