We have reached April and the spring season; the time of year when divorcing couples either fight over tax deductions or stupidly sign joint income tax returns when they should not.
Here are some tips that might save you a call to the lawyer and the bill associated with that call:
1. Tax Deductions:
You get a tax deduction just for being alive and you get one for each dependent child who lived with you for more than half the year. A deduction is a subtraction from income and for the 2009 tax year (the return due in April, 2010) the deduction is worth $3,650.00.
Does this mean that by claiming the child you save that amount in income tax? No. You get to reduce the amount of income you pay tax on by $3,650.00 . So, if you earned $50,000 in 2009, you will only be taxed on $46,350. This is a good thing. But what is that deduction really worth? To figure that out, you need to know your marginal tax bracket. People seem to think that their tax rate at the Federal level is 33% – 35%. It might be, but you have to earn a lot of income before the government starts to tax you at that rate. Most Americans fall into marginal brackets of 15% – 28%. That means that the real tax savings from the personal deduction (also called an “exemption”) is either 15% or 28 % of the $3,650.00.
As a result, deducting the child saves you either $547.50 or $1,022.00 in actual income tax. You need to know this because you may allow a non-custodial parent to take the deduction (Form 8332) and you might even get the person to give you something for the deduction if his/her tax rate is higher than yours.
Who gets the deduction? The parent with primary custody during the tax year, not the parent who paid more support. If you equally share physical custody of the child, the deduction for the child goes to the parent with the higher income no matter who spent the most on the child.
2. Tax Credits:
There is also the animal known as a “tax credit.” A credit, unlike a deduction, is an actual credit on the tax you owe, unlike a deduction or exemption which lowers the amount of income subject to tax.
There are tax credits for what you pay for dependent day care. You can claim the credit if you pay the day care even though you don’t get to the deduction for the child.
3. Joint Tax Returns:
If your recently separated spouse shows up at your door with a joint tax return this month and you have not had time to discuss it with your attorney; DO NOT SIGN the return. This will make your spouse angry but that is not our purpose (even though it might be yours.)
A joint tax return is a joint liability. When you sign the return you are warranting that it is accurate. Make certain that it is. Or at least get a written agreement that if it is not, you will not be the one paying the bill. This is especially true where income comes from self employment or a closely held business such as a Subchapter S corporation.
Most folks just sign these returns out of habit, others do it to avoid a fight, and some do it because their spouse shows them they will get a refund that can be shared. Just be aware. The return with the $3,000 refund could be a return that costs you $10,000 if the IRS finds that the return is inaccurate by $30,000. And unless you can shoehorn yourself into a status called “innocent spouse,” the IRS has the right to collect all of the tax from either joint filer, no matter who was responsible for producing the income.
If you want to avoid a fight or at least make it a smaller one. Download the form the IRS has on its site for a tax extension to August 15. The grant is automatic if you pay any tax due for 2009 by April 15 when you file for the extension.