Husband's income is about $75,000 and wife's income is about $30,000. Divorcing with 3 children, 50/50 shared physical custody. Children are 17, 16, 14. Filing separately, EITC is substantial for wife and refundable and husband doesn't qualify for EITC. EITC must be based on who has custody of the child more than 1/2 the year (the 365th day) regardless of agreement or decree. Whereas, child tax credit and exemption may be released via IRS Form 8332, but tie break goes to higher income earner.
This is something you need to be discussing with your divorce attorney so that it can be made part of the proceedings. If you do not have one I recommend that you hire one to protect your legal rights. Hopefully the matter will be settled amicably between you and your spouse.
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I'm a Virginia lawyer so can't speak for PA law. My clients who share physical custody generally will agree to alternate the tax break (child dependent) every other year in their property settlement agreement, which is incorporated into the final order.
You need to consult an attorney on this matter. The nuisances of who will receive the better tax exemptions will need to be thoroughly analyzed. Several things will come into play that aren't mentioned in your paragraph: Is there any spousal support being paid? What other tax advantages come from the marriage (mortgage and property insurance deductions, etc.).
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Most of these issues are reviewed and dealt with in the Divorce Decree, a Post-Nuptial Agreement or Child Custody Agreement at the time of divorce. If you are sharing custody (50-50) during the year, then certain IRS issues must be resolved or your tax situation will become overly complicated and could result in penalties.
In addition, there are the child support issues that need to be addressed, which is mentioned in your question. Although there is a disparity in the income of the two spouses, the child support issue also affects the tax situation for the parents individually.
The IRS assumes that the parent who has physical custody receives the tax exemptions for the “dependent” children, which is another issue that needs to be addressed.
You may want to review all the parameters on the IRS Web site, specifically Publication 504.
It is clear that you need to consult a good Family Law Attorney and, perhaps, a good Accountant on how best to work your way through all these issues. It is highly recommended that you address the issues ASAP in order to avoid long tern problems with the IRS and the State re: taxes. You and your Ex should come to an agreement with the help of counsel and put all of these issues to rest.
The response provided here is given in an attempt to assist a questioner with general legal principles and for educational purposes and is not to be considered legal advice given to a paying client. To ensure compliance with requirements imposed by the IRS, and that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
I generally agree with all of the answers posted so far; just wanted to note the importance of alimony and child support in structuring the division of the marital estate post divorce. Just consult with your cpa or tax advisor to make sure that any alimony received by the wife does not impact the EITC because it is taxable income (and deductible to the husband). I don't believe alimony is considered "earned income" for purposes of the EITC, but have your advisors confirm. If it is, you can always structure any payments going from the husband to the wife with a component of child support (even though there is shared custody) because it is not considered taxable income.
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