As we now approach the deadline for filing our 2014 federal income tax return, many divorced parents are asking this question, “Which parent may legally claim their children on their tax return”? This question has become complicated with the rise in fathers’ rights, expansion in non-custodial parents visitation periods, and advance parenting schedules allowing children to spend quality if not equal time with both parents throughout the year.
In the past the Internal Revenue Code provided that the custodial parent was allowed to claim the minor children on his/her federal income tax return. Mom was usually the custodial parent and Dad usually had the children every other weekend.
The Internal Revenue Code states that the parent with whom the child lived with for the greater number of nights during the year is entitled to claim the dependency exemption.
If during or following a divorce in final judgment, the two divorcing parents agree that one parent shall claim the child as a dependent in odd numbered years and the other parent in even numbered years, or if the divorcing parents have more than one child, one parent shall claim some children, while the other parent shall claim the other children, this agreement in your final divorce decree will be honored by the IRS.
If your divorce was final before 2008, just attach the final divorce decree to your tax return. If your divorce was final after 2008, your ex-spouse must fill out IRS form 8332 which provides the name of your children that you can claim on your federal income tax return.
I you are divorced in 2014 and have questions please contact your tax adviser or go to the website http://www.irs.gov/Forms-&-Pubs for more information.
In Texas, Community Property Laws apply in determining the Property Distributions to a wife and husband. This system is employed to divide the property fairly between the divorcing couple.
What is Separate Party? Texas Family Law Code, FAM 3.001: A spouse’s separate property consists of:
The property owned or claimed by the spouse before marriage
The property acquired by the spouse during marriage by gift, devise, or descent
The recovery for personal injuries sustained by spouse during marriage, except any recovery for loss of earning capacity during marriage.
The terms “owned and claimed” as used in the Texas Family Code means that where the right to the property accrued before marriage the property would be separate. Inception of title occurs when a party first has a right of claim to the property by virtue of which title is finally vested. The existence or nonexistence of the marriage at the time of incipiency of the right of which title finally vests determines whether property is community or separate. Inception of title occurs when a party first has a right of claim to the property.
Under Texas Constitution, Art. XVI, Section 15, separate property is defined as all property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise or descent, shall be the separate property of that spouse; and laws shall be passed more clearly defining the rights of the spouses, in relation to separate and community property; provided that persons about to marry and spouses, without the intention to defraud pre-existing creditors, may by written instrument from time to time partition between themselves all or part of their property, then existing or to be acquired, or exchange between themselves the community interest of one spouse or future spouse in any property for the community interest of the other spouse or future spouse in other community property then existing or to be acquired, whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property and estate of such spouse or future spouse; spouses may also from time to time, by written instrument, agree between themselves that the income or property from all or part of the separate property then owned or which thereafter might be acquired by only one of them, shall be the separate property of that spouse; if one spouse makes a gift of property to the other that gift is presumed to include all income or property which might arise from that gift of property; and spouses may agree in writing that all or part of the separate property owned by either or both of them shall be the spouses’ community property.
What Is Community Property? Texas Family Law Code, FAM 3.002: Community property consists of the property, other than separate property, acquired by either spouse during the marriage.
Texas Family Code, Section 3.003 states that all property possessed by either spouse during or at the dissolution of the marriage is presumed to be community property and that the degree of proof necessary to establish that property is separate property, rather than community property, is clear and convincing evidence. Clear and convincing evidence is defined as that measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established. If property cannot be proved clearly and convincingly to be separate property, then it is deemed to be community property.
The Texas Family Code, Section 7.002, deals with quasi-community property and requires a court divide property wherever the property is situated, if 1) the property was acquired by either spouse while domiciled in another state and the property would have been community property if the spouse who acquired the property had been domiciled in Texas at the time of acquisition; or 2) property was acquired by either spouse in exchange for real or personal property and that property would have been community property if the spouse who acquired the property so exchanged had been domiciled in Texas at the time of the acquisition.
What about Property Acquired during Marriage? Property in which inception of title occurs during marriage is community property unless it is acquired in one of the following manner, in which it becomes separate property of the acquiring spouse:
By devise or descent
By a partition or exchange agreement or premarital agreement specifying that the asset is separate
As income from separate property made separate as a result of a gift, a premarital agreement or a partition and exchange agreement
In exchange for other separate property
As recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.
During a divorce, it is important that both parties know what type of property is involved in the divorce and what is separate and community property. This knowledge may determine or influence what each party will receive at the end of the settlement.
Preparing for a Texas Divorce – Part 1: Assets
Preparing for a divorce is painful no matter the circumstance. Before you get into the tangle of the divorce process, you can reduce the expense, stress and conflict many people face by making sure you are prepared. Planning ahead allows you to make sound decisions and start preparing for your life post-divorce, and may also help you avoid post-divorce pitfalls. Below is a list of items you may want to gather before counseling with an attorney.
- A Listing of all Real Property, address and location, including (include time-shares and vacation properties):
- Deeds of Trust
- Legal Description
- Mortgage Companies (Name, Address, Telephone Number, Account Number, Balance of Note, Monthly Payments)
- Current fair market value
- Mineral Interests (include any property in which you own the mineral estate, separate and apart from the surface estate, such as oil and gas leases; also include royalty interests, work interests, and producing and non-producing oil and gas wells.
- Name of mineral interest
- Type of interest
- County of location
- Legal description
- Name of producer/operator
- Current market value
- Cash and accounts with financial institutions (checking, savings, commercial bank accounts, credit union funds, IRA’s, CD’s, 401K’s, pension plans and any other form of retirement accounts):
- Name of institution, address and telephone number
- Amount in institution on date of marriage
- Amount in institution currently
- Account Number
- Names on Account
- Publicly traded stock, bonds and other securities (include securities not in a brokerage, mutual fund, or retirement account):
- Number of shares
- Type of securities
- Certificate numbers
- In possession of
- Name of exchange which listed
- Pledged as collateral?
- Date acquired
- Tax basis
- Current market value
- If stock (date option granted, number of shares and value per share)
- Closely held business interests:
- Name of business
- Type of business
- % of ownership
- Number of shares owned if applicable
- Value of shares
- Balance of accounts receivables
- Cash flow reports
- Balance of liabilities
- List of company assets
- Retirement Benefits
- Exact name of plan
- Address of plan administrator
- Starting date of contributions
- Amount in account on date of marriage
- Amount currently in account
- Balance of any loan against plan
- Insurance and Annuities
- Name of insurance company
- Policy Number
- Type of insurance (whole/term/universal)
- Amount of monthly premiums
- Date of Issue
- Face amount
- Cash surrender value
- Current surrender value
- Designated beneficiary
- Motor Vehicles (including mobile homes, boats, trailers, motorcycles, recreational vehicles; exclude company owned)
- Name on title
- VIN Number
- Fair Market Value
- Name of creditor (if any), address and telephone
- Persons listed on debt
- Account number
- Balance of any loan and monthly payment
- Net Equity in vehicle
- Money owed by spouse (including any expected federal or state income tax refund but not including receivables connected with any business)
10. Household furniture, furnishings and Fixtures
11. Electronics and computers
12. Antiques, artwork and collectibles (including works of art, paintings, tapestry, rugs, crystal, coin or stamp collections)
13. Miscellaneous sporting goods and firearms
15. Animals and livestock
16. Farming equipment
17. Club Memberships
18. Travel Award Benefits (including frequent flyer miles)
19. Safe deposit box items
20. Burial plots
21. Items in any storage facility
22. A listing of separate property (property prior to marriage, family heir looms, property gifted)
- 23. Listing of all liabilities (including mortgages, credit card debt, personal loans, automobile loans, etc.):
1. Name of entity, address and telephone number
2. Account number
3. Amount owed
4. Monthly payment
5. Property securing payment (if any)
6. Persons listed as liable for debt
You are getting divorced! After the emotional decision is made you must address financial situations impacting the family breakup.
What are the major financial pitfalls of a divorce? Are you prepared to stay on top of all financial problems and decisions in this divorce to strive for a financial win-win situation?
Where’s the liquid cash? Divorce generally never goes as fast as you would like nor do you receive as much as you think you should! If divorce is imminent start saving up money now! You will need to pay divorce expenses and have support for your new household. There will be many unanticipated costs that may drain you financially.
- If you don’t have a credit card in your name get one now. If you share credit with your spouse, close out as many credit cards as possible if he/she can charge on your credit. Even if you don’t use the cards, the account balance will still be owed and both spouses may be legally responsible for the debt.
Not Prepared for this Divorce? Divorce is a serious change of life event. Get Prepared Now! Timing is all important! When is the best time for you to get divorce? Make sure your financial situation is good before you take the divorce leap. Need new tires, buy them. Kids need dental work, see the dentist. Just remember: after the separation, your expenses will be paid by court order and not always be to your liking.
Where are the important divorce financial records? Don’t leave without all your documents that identify what you and your spouse accumulated during your marriage and which can establish the fair market value! Even if you were not in charge of finances while you were married, you must secure copies of all records. You are entitled to your share of financial property and any additional income you find may increase the earnings that calculate child support or spousal maintenance support. What are you looking for? At least three years of tax returns, mortgage paper on your home, wills, trusts, bank, credit card, and financial statements, car registrations and titles, insurance policies, and deeds to real estate. If you have separate property from inheritance or gifts from your family, make sure you have all records of these transactions. Our blog, Texas Financial Checklist http://dld.bz/dqcej is a detailed list of items and records needed to have before filing for divorce. A very good item to use for your preparation!
Have you overlooked any Divorce Assets? If a business is involved a forensic accountant may be hired to look of any signs of additional income or overstated expenses.
- Hobbies and side businesses that use expensive equipment or generate income needs to carefully be looked out. Are you entitled to compensation for expenses you paid to get your spouse through school?
- All assets, big or small can add up. These assets can always be used for trade on something you can use.
- Your spouse may try to hide assets. By keeping all documents and paystubs to make sure there are not any irregularities, things usually work out fine. Stay honest and reveal your assets.
Do Not Ignore Tax Consequences! Divorce may or may not create taxable events but you must report it on your tax return. Should you sell the house now to claim the capital gain exclusion? Who should be paying the mortgage until it sells? Should you take your spousal maintenance monthly or in a lump sum? What about retirement funds? An accountant can help to determine the best path for you on these questions.
Passive Observer of your Divorce? NO! Get control of this process, focus on practical things and work with your future Ex to get this divorce over! You can do this! There is a reason for this divorce and you are the master/mistress of your destiny. Your children need you now to be a responsible parent and wise decision making will save you time and legal fees. Listen to your attorney but you make the decisions!
Is Divorce your survival plan? Now that you have decided to divorce you must break it to your children. People engaged in a Divorce should be in survival mode. The person who will be your future “EX” is looking out for themselves and you need to look out for yourself and your children. YOU must insist within reason on getting what you need and deserve! Emotions and money do not mix! You must be able to take care of yourself and your family financially so look at all property division decisions very carefully and make good decisions to bring the divorce to a successful conclusion.
Prepare for the worst! When entering into a divorce, prepare yourself for the worst! If you are prepared for anything, than your fears will not cause you to panic and you will keep control of your situation. Outside of death, divorce is considered one of the worst emotional situations that a human being will ever experience!
How will you support yourself and the kids after divorce? Hopefully this is not a problem, but now would be a good time to get some career counseling at a community college, university or local job center. Having a fulfilling career is lucrative and helps your self-esteem!
Get Good Advice! Decisions you make now will affect the rest of your life. Find a good, knowledgeable attorney to help you though the rough spots. If you are emotionally a wreck, find a good therapist. If you feel there are hidden assets, hire a forensic accountant. Now is the time to get the best advice you can afford! You will have to live with your financial decisions for a long time.
So you have now decided to divorce. You know it will be painful & scary, but you believe the time is right to have a single life. Financial vulnerability and risks are inevitable.
Every year, approximately three million men and women head down the emotional and financial path of divorce. Following a divorce the cost is usually 25-50% more to maintain your pre-divorce lifestyle. A single household becomes twice as expensive as each spouse losses the benefit of the other spouses income. Economic discrimination due to gender gaps place additional financial burdens on women. A woman’s standard of living may drop 27% while a man’s standard of living may increase 10%!
Now start with the financial basics in surviving your divorce! What are the basics?
A secure place to live
Create little or no debt
Protect retirement assets or income
Use of liquid money or assets
The most important of these basics is Liquid money! You will need money to find a place to live and hire an attorney. You will also need money to pay your expenses during your divorce. Liquidity will definitely come in handy and enhance your position in the proceedings.
What about Debts? If possible pay off your debts now. The uses of savings or assets you can liquidate are the cleanest methods. Many divorced people find themselves responsible for their EX’s portion of debt since the exiting spouse refuses to pay. Legally, you may be responsible if your ex-spouse does not pay. Try to start your new life free of debt and with a new sense of self confidence!
What about Cash Issues and Retirement Assets in a Divorce? If you and your spouse have retirement savings, each of you will probably be entitled to a one-half share or a portion based on a fixed ration of the number of years married and number of years of investing. This money could be kept for retirement or used to repay other current expenses or debts. Make sure you examine prospective tax treatment to avoid the 10% penalty on early withdrawal by the IRS.
Some tax questions to know about:
Are spousal maintenance payments tax deductible?
Who will be able to claim Head of Household status?
Who gets the tax exemption for the kids?
Is child support non-deductible?
Which Attorney fees are tax deductible?
Always remember to “Look at the big picture”. Keep your focus on finances and parenting. If you need help from smart professions, as your attorney, accountant, or mental-health professional, get it now! They will help you and your family with focus, objectivity and a long-term vision that is very difficult for you during this tumultuous time in your life. Now you need to be able to articulate you needs and goals for the future.
Do not forget! This time too shall pass and you may be, with planning, better than ever in the future!