Tax planning and tax issues are important considerations in a Pennsylvania divorce case. Where the parties are negotiating a settlement with support of minor children, alimony and property division elements, tax results should be considered and incorporated into the agreement. An experienced family law practitioner will counsel the client so that he/she understands and agrees to the full tax ramifications of any agreement that is achieved.
When one of the spouses earns substantially more than the other, negotiations can be directed toward legally shifting income from the higher-earning spouse to the lower-earning spouse. One basic starting rule is that child support is not income to the recipient and cannot be deducted by the paying spouse. Conversely, alimony is treated as income to the recipient and is deductible by the paying party.
An important negotiating point may concern who gets the dependency deduction for a minor child. The general rule is that the parent who provides more than half the child's support during the tax year is deemed to be the custodial parent, at least for tax purposes. This may become a bargaining issue during divorce negotiations. If the noncustodial parent agrees to pay a generous amount for child support, that parent may be able to obtain the benefit of one or more children as dependency exemptions as part of an agreement.
The custodial parent must be aware, however, that if the dependency exemption is waived to the other parent, the custodial parent will lose the Child Tax Credit. Another possible negotiating goal may be to shift income to the lower-earning custodial parent from the higher-earning noncustodial parent. In so doing, the overall tax burden may be reduced for both parties.
Thus, in that situation, the lower-earning custodial parent can receive income and still benefit by being in a lower tax bracket. At the same time, the higher-earning parent can reduce his/her tax bite by deducting all payments. The process of negotiating tax issues during the divorce is complex and should not be attempted without the support of a family law attorney who is familiar with both the federal tax code and the relevant laws of Pennsylvania.
Source: Forbes, "Taxes And Family Law: A Cheat Sheet Of What You Need To Know", Stephen Hicks, Sept. 8, 2017