Divorce Settlement Agreements – Six Tax Breaks That Divorcing Individuals Need To Know About Now



Posted: Tuesday, December 01, 2009

by John Faggio
Faggio Financial LLC

Divorce settlement agreements specify who will be claiming the dependency exemption, and that exemption can be released in future years. Some tax breaks, for example the Child Care Credit, belong to the custodial parent even if that parent releases the exemption to the noncustodial parent. But what about other tax benefits that may be attributed to the parent who is not entitled to the dependency exemption?

Under an IRS Ruling issued in 2008, there are certain tax benefits that both parents are entitled to, regardless of which parent claims the dependent exemption.  Both parents can treat the child as a dependent for the purposes of these tax breaks ("for that child"):

  1.  Itemized deductions for medical expenses
  2. Tax-free employer reimbursements for medical expenses
  3. Tax-free treatment for employee discounts and no-additional-cost services
  4. Tax-free distributions from medical savings accounts  (MSA's) when the distribution is used to pay the child's qualified medical expenses
  5. Tax-free employer provided coverage under a health plan
  6. Tax-free distributions from health savings accounts  (HSA's) when the distribution is used to pay the child's qualified medical expenses
This rule only applies to parents who are divorced, legally separated, or live apart at ALL times during the last six months of the year and the following tests are met:
In an example where one spouse is in a much higher tax bracket than the other, maybe it would more tax efficient to reduce child support and let the paying parent pay for more medical costs. This may enable that parent to take advantage of some of the tax exclusions outlined above and produce tax savings that will help both parent's cash flow.

This ruling further emphasizes the need for divorce financial planning while you are in the process.You may also want a divorce financial planner to review the settlement agreement once it is complete.

In an example where one spouse is in a much higher tax bracket than the other, maybe it would more tax efficient to reduce child support and let the paying parent pay for more medical costs. This may enable that parent to take advantage of some of the tax exclusions outlined above and produce tax savings that will help both parent's cash flow.

As a divorcing individual, do you need to learn more about other tax strategies that will increase your paycheck? See our library of articles and offer for fixed-fee consultations. Faggio Financial LLC is Central Maryland's only exclusive matrimonial financial planning practice. John Faggio is a CPA, CFP® and CDFA™ who has helped hundreds of divorcing individuals reach financial divorce settlements in a rational, expedient, and cost-effective manner.


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Top-level comments on this article: (1 total)
» left by Mark Parsec
 2 years 173 days ago.
283 fans.
Hi John,
 
Welcome to SearchWarp. Been there... done that. This is information that people need. Thanks for your article.
 
Mark
» left by John Faggio 2 years 165 days ago.
3 fans. Follow John Faggio on twitter!
Thanks, Mark. I get that "been there, done that" many times. I'm trying to let others know that rationale can be part of the process
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