There is often a disconnect between what a court directs a taxpayer to do and what is permitted under the Tax Code.
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It can be seen in issues related to the child and dependent care credit, the earned income credit, Head of Household filing status, and other items that relate to the area of divorced parents. However, it can surface in other areas as well, noted Robbin Weiner, CPA, of Dayton, N.J.-based E. Martin Davidoff & Associates.
“As professionals we not only have a responsibility to fully explain all of the tax implications of these matters to our clients, but also to advise them on these matters, and to follow up to make certain that they are adhering to the agreements that they have entered into,” she said. “This should be the case with attorneys and judges as well.”
“There are a million areas in which how the court resolves an issue isn’t the way the IRS treats it, so you end up in court to see what the contract said,” she observed.
She cited a recently divorced client who came into her office. “The divorce court declared that the parents of the child were to split the aftercare expenses. The mom was the custodial parent and in order for her to work, she incurred additional after care expenses. The court instructed the father to reimburse her for 60 percent.”
The father’s former accountant prepared a return and told him to just put the credit on the return and say he was the Head of Household. “But you’re not allowed to do that if you’re not the custodial parent,” said Weiner.
The custodial parent is generally the parent with whom the child lived for the greater number of nights during the year, according to Form 8332 instructions.
“Form 8332 releases the claim to the exemption for a child by the custodial parent,” said Weiner. “The waiver may be used by the noncustodial parent for the purpose of claiming the child tax credit and the dependency exemption. But Notice 2006-86 specifically says that the noncustodial parent cannot claim the child and dependent care credit.”
“The court said to the father that he had to reimburse the mother for an expense she’s ultimately not incurring because she’s receiving a portion back as the dependent care credit,” said Weiner. “The court said she didn’t have to reimburse him—he had to get it back on his own return—but it’s not an option for him to do it that way.”
“The end result is that the court ordered him to do it one way, but the IRS doesn’t allow it that way,” she added. “The only way to correct this is to permit the paying parent to make the reimbursement net of the anticipated dependent care credit.”
“The fact that attorneys and judges are not familiar enough with these areas creates additional stress and expense for the parties involved,” Weiner said. “In this case, they have to go back to their lawyers to resolve the situation.”
The takeaway is that accountants, lawyers and tax advisers should be on guard for these situations, and do the necessary work ahead of time to avoid them.