Tax Custody ConsiderationsFiling your taxes can be a complicated task, and for those that have a custody schedule or order for your child, you may have additional questions when it comes to your income tax return.  You may be wondering if you are able to claim your child as a dependent and what factors are considered when this decision is made.

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Tax Considerations Wilder MahoodSeparation and divorce will impact your tax situation. Questions will abound as to filing status, dependency exemptions, and liability for tax issues. Should you file jointly? Is a written agreement as to taxes necessary? How do tax issues intersect with support payments? What tax issues will arise with the transfer of marital assets?

If you’re in a situation where you’re paying or receiving alimony, there are a few rules to consider when filing your taxes. Unless agreed upon otherwise in your settlement, spousal support, alimony pendente lite (support during the pendency of the divorce) and alimony payments received during the year are treated as taxable income while payments made during the year are treated as tax deductible. There are other factors to consider when filing your taxes if alimony is involved, and below are a few questions and answers to help. (more…)

Brian McKinley, partner at the Pittsburgh family law firm Wilder Mahood McKinley & Oglesby will speak at Clarion University’s Legal Conference on October 20, 2017 at the Park Inn in Clarion.
The annual conference is attended by over 100 members of the local bar to address current legal issues. For the 7th year, McKinley will present an update on all family law cases, as well as any changes to rules and statutes over the past year.

If an interest in a small business or closely held business arises during the marriage, divorce will typically involve the distribution of the business to one spouse; a buy-out of the other’s interest is often necessary, as divorcing spouses cannot be expected to work together.  However, where spouses will have little contact, the court may award the business to both spouses.  Sometimes a trustee may be appointed to oversee the operations of the business.

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What date is used to value marital property during equitable distribution of the marital estate?

Because the value of some assets fluctuates from time to time, the valuation date of marital property is generally the time of distribution unless the property is no longer in existence. In some instances, a date of separation value may be appropriate, where an asset, such as a business, is in the sole control of one of the parties during the period of separation. A date of separation value does not necessarily require the imposition of prejudgment interest, although such a claim may be asserted.

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Marital Property is a property interest acquired between the date of marriage and final separation of husband and wife. Property is marital regardless of whether it is held in joint or individual names if acquired during this time period, unless it was acquired in exchange for pre-marital, gift or inherited property (non-marital or separate property).  Increase in value of non-marital property accruing during the marriage through final separation is, itself, also marital property.

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Spousal support, alimony pendente lite (support during the pendency of the divorce) and alimony payments are treated as taxable income to the payee and deductible to the payor for tax purposes.  However, child support payments are neither taxable income to the payee, nor tax deductible to the payor.  Court orders that include spousal support or alimony, and child support, are treated as taxable income to the payee and tax deductible to the payor, if such orders are categorized as unallocated.  When the order specifically allocates a particular amount as spousal support or alimony, and specifically allocates a particular amount as child support, only the amount allocated as spousal support or alimony is considered taxable income for the payee and tax deductible to the payee.
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During high net worth divorces when well-compensated spouses divorce, one issue that may arise is how to deal with stock options held by a spouse as part of his or her benefit package.  In Pennsylvania, such stock options are considered a form of deferred compensation designed to induce the employee/spouse to remain loyal to the employer; accordingly, Pennsylvania courts view stock options as analogous to pension benefits, and thus marital property.  The trick is to value the options at the time of divorce, even though it is unlikely that the options will be exercised at that date.

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A party’s right to claim one’s child as a dependent on income tax returns depends upon the number of overnight custody periods the child spends with that parent.  The parent with the greater number of overnight custody periods of the child during a tax year will be entitled to claim the child as a dependent on their tax returns for that tax year.  If the child spends an equal number of overnights with each parent during the year, the parent with the higher income is entitled to claim the child as a dependent on his or her tax return.  The parties can also agree on which parent can claim the child as dependent, but must execute the proper tax form to effectuate such agreement.

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Almost unequivocally, divorcing parties are required to disclose the nature and extent of their finances, including income, cash flow, and assets.  Where a divorcing spouse owns a significant interest in a closely-held business, that party must disclose the full economic contours of the business upon request from the other party.  The court will enforce such “discovery” requests so long as the information sought is relevant to the financial picture of the business-owning spouse.  The exception is where the parties settle matters by agreement.  Recent Pennsylvania Superior Court precedent provides that a divorcing party may waive his or her right to full economic disclosure.  However, the waiver must be explicit, and the agreement must be made absent fraud, misrepresentation or duress.  If these requirements are met, the court will not inquire as to the “fairness” of an agreement.

At Wilder Mahood McKinley & Oglesby, we are highly skilled in navigating the waters of a complex divorce, where high value assets, such as a business, may be involved.  Indeed, “we wrote the book” on it.  If you have concerns regarding the impact a separation or divorce may have on your business, contact us for a consultation.