Tag Archives: financial

Child Support and Taxes

Tax season is upon us and I’ve been getting a lot of questions about child support and taxes. First, Colorado child support is generally not taxable. Unlike maintenance/alimony, the payor of child support cannot deduct paid child support from their taxable income. Similarly, a parent receiving child support need not report that money on their tax return.

Second, a minor child can be claimed as a dependent on a parent’s tax return. Who gets the dependency exemption? Pursuant to C.R.S. 14-10-115(12), the Colorado court is required to allocate the right to claim a child as a dependent in proportion to the parents’ contributions to the costs of raising the child. If a mother has more parenting time than the father and she pays for the child’s sports, tutoring, health insurance, daycare, etc., the court will likely give her the right to claim the child as a dependent.

Nevertheless, the parties can always voluntarily agree on which parent gets to claim a child in a particular year. Although Colorado has done away with the term “custody” in favor of “parenting time,” the IRS predictably is behind the times. The “custodial parent” matters for IRS purposes and is defined as the parent with the most overnights. Because there are an odd number (365) of days in a year, one parent will almost always have more than the other even when they are “50/50 parents” or have “equal time.” That parent is then the “custodial parent” under the current IRS regs and the one eligible to claim the child as a dependent. There are times when the IRS regs conflict with the Colorado law on who gets to claim the child as a dependent. As a result, it is usually a good idea for parents to sign IRS Form 8332 along with their divorce or allocation of parenting rights agreements to ameliorate any issues down the road if the parties agree to split the right to claim a child on future tax returns.

In addition to the dependency deduction, the current tax code allows for a separate deduction for work-related day care and a credit (different from a deduction) for each child. The rules on those deductions and credit are complex because they hinge on the taxpayer’s income and other factors. Tax laws change all the time and my advice is always for a client to consult with a CPA or tax attorney before signing a deal.

Although parties going through a Colorado divorce or dispute over parenting rights often times will disagree about the color of the sky on particular day, there are times when it makes sense for them to strategically work together on taxes. For example, if one parent cannot benefit from the tax credit because they make too much money, they can offer to give the other parent the right to claim that child and split the amount of the credit. It results in a “win-win” for both parents. It is rare to characterize anything as a “win-win” in a Colorado divorce or when discussing anything related to taxes, but it is possible if the parties have thoughtful divorce lawyers and CPAs.

Colorado Maintenance (Alimony) Threshold Test

Before a court even gets into the new Colorado spousal maintenance (alimony) guidelines previously discussed, a threshold test is applied. There are two prongs of the “threshold test” under C.R.S. 14-10-114.

Sufficient Property

First, the court must find that a spouse lacks sufficient property to provide for his or her reasonable needs. This means that a court must divide property in the divorce before turning to the issue of maintenance. If a spouse is awarded an income-producing asset, such as a rental property, they are less likely to need maintenance/alimony from the other party. However, a spouse is not required to sell or consume property awarded to them before being entitled to maintenance.

What does “reasonable needs” mean? It depends on the particular circumstances of each case – an inherently squishy and debatable concept. The standard of living established during the marriage is a relevant factor. A marriage where frequent travel and fine-dining were enjoyed is different than a spartan one. The reasonable needs will be based on the present circumstances at the time of the hearing rather than the past or future conditions.

Spousal maintenance is to provide the means to obtain food, clothing, habitation and other necessities. Colorado courts have taken a fairly expansive view of “reasonable needs,” and stated that it does not mean the minimum requirements to sustain life. Nevertheless, a court is not required to ensure spouses have an equal lifestyle forever.

The totality of the parties’ financial circumstances will also be considered. If a spouse is the beneficiary of a trust, that may be considered even though the trust is not “property” under Colorado law. The reasoning behind this rule is easy to understand – a party doesn’t need maintenance/alimony if they’ll be perfectly fine on their own.

Appropriate Employment

If property awarded to a spouse is insufficient to provide for their reasonable needs, the court will move on to the second part of the threshold test: employment. A person won’t need maintenance/alimony if he or she can support themselves on their own. Again, each case is different.

The court will determine what is “appropriate employment” for a spouse requesting an award of maintenance. The expectations and intentions established during the marriage will be considered along with the age, education, work history, health and of the requesting spouse. A court will also take into account if a person is voluntarily underemployed or completely unemployed. A famous Colorado divorce case (In re the Marriage of Elmer) involved an attorney that voluntarily quit practicing law and decided to pick apples at $10/hour. The court imputed income to that party based on his higher earning capacity.

The above is a brief summary concerning Colorado’s “threshold test” for awarding maintenance/alimony in a divorce. There are a number of other factors that a court will consider in a Colorado divorce where a party is requesting spousal maintenance. Those factors will be discussed in upcoming posts.

The Cost of a Divorce

Interesting article on the cost of divorce online at the Washington Times. According to the article, Avvo performed a survey of consumers and attorneys on the priority of concerns of those going through a divorce. The cost of divorce was #1.

As the author points out, it is nearly impossible to predict the cost of a divorce. An attorney has little control over the other party, the judge, or the opposing attorney. If children are involved, the cost of a divorce in Colorado is generally higher. Similarly, the costs rise dramatically when a parent wants to relocate, a party tries to hide assets or income, especially if they are self-employed, or the parties cannot be civilized and communicate on simple issues.

Each divorce is different. For those considering a divorce in Colorado, I suggest they at least consult with an attorney about their options before filing a petition and, especially, before signing a parenting plan or separation agreement. Most family law attorneys do not charge for initial consultations, and some offer unbundled legal services. Having a lawyer review a final agreement, or represent you for one hearing, is money well spent because it reduces the risk of issues coming up in the future. As in all walks of life, you get what you pay for.

529 College Plans

Morningstar recently issued a report for 529 college savings plans, including two in Colorado that earned a “bronze medal.” These plans are great vehicles for parents to save money for their children’s post-secondary education costs. The number “529” is in reference to the applicable IRS tax code provision. For more info on 529 plans, see here.

Morningstar Ratings for College Savings Plans