Blended families face complex tax issues
The traditional family is no longer so traditional. Increasingly children are living in blended families, bringing complex tax issues to their parents’ accountants.
“According to the IRS, everybody fits in a biological family: two parents who are married, 2.3 biological children, and that’s it. They file jointly, and you sign your name,” said Jane King, who runs the firm Fairfield Financial Advisors with her daughter Caroline Hedges, in Wellesley, Mass. “Now there are so many different models, whether it’s grandparents raising children, or people who are together and have children, but are not married, or people who are divorced, and there’s joint custody, with two nights at one house and three at another. It’s confusing for accountants and for people who are in nontraditional situations or relationships to figure out what to do.”
The share of children in a two-parent household is at the lowest point in more than 50 years, at 69 percent, compared to 73 percent in 2000 and 87 percent in 1960, according to a December 2015 report by the Pew Research Center. Sixty-two percent of children live with two married parents, while 15 percent are living with parents in a remarriage and 7 percent are with parents who are cohabiting. The share of children living with one parent is 26 percent, up from 22 percent in 2000 and 9 percent in 1960.
King and Hedges advise many blended families in their practice. “Caroline and I are products of a blended family, so we walk the walk,” said King. “It’s very complicated and many of our clients are parts of blended families, and perhaps they feel more comfortable talking to us, who are part of that. We know the pitfalls and the emotional baggage that comes with that, and the complexity of raising children who you’re not the mother of—who pays for what, how do they spend vacations, how do they handle college tuition, etc. Very often those things are not as clearly spelled out in a divorce agreement as they should be, so many issues pop up after someone’s been married five years. Now it’s time for college, and who handles what? The estate planning piece is huge.”
One of the questions many accountants deal with at tax time is whether a married couple should file jointly or separately, and that can be a complicated issue for blended families.
“Where there’s newly formed families who have previous commitments, do you file jointly right from the get go, or do you do married filing separately?” said King. “When you go to your accountant, you have him or her run it both ways, because there are many advantages to filing jointly and obviously there are disadvantages.”
For couples who have split and share joint custody, the question of who gets to take a child deduction can be difficult to work out. The parent who has cared for the child for more than half the year is entitled to the deduction, according to King. “But how finely you’re keeping track of that—where they spent the night, where they practiced soccer—can become an issue among parents,” she added. “Often people aren’t even aware they need to keep track. If it’s a reasonable relationship, then you can work with the accountant and say the child deduction is going to be more useful to him than her or vice versa. I don’t think the IRS is coming to check how many nights, but clearly you can’t both take it, so one person has to have the conversation. And some divorced spouses don’t ever have conversations.”
She advises accountants to ask a lot of questions of their clients who are sharing joint custody.
“What are you assuming has been done, and what do you think has been the agreement with the various exes? Who’s going to get benefits like the Earned Income Credit, the Child Tax Credit, the exemptions, because likely the couple hasn’t even talked about it,” said King. “Often the accountant can be helpful in saying, ‘Well, tell me what you’ve earned and various other information that’s germane to the taxes.’ And run the numbers both ways. If you file jointly this would be it, but again if you’re worried your husband isn’t going to pay the bills, you might not want to file jointly. There are various wrinkles to this. There’s an income cutoff for the Earned Income Credit and the Child Tax Credit. If you’ve got a huge income you’re probably not going to qualify anyway, so you might as well let your ex, who might have a lower earned income, take it. But it all has to be agreed on. I think accountants are used to families sitting in a box, but certainly in the last decade nobody fits in the box, and I don’t think anybody’s going back in the box. It will only become more numerous in terms of nontraditional relationships.”
She advises blended families to seek expert advice at tax time. “Between now and April 18, so many people who are in nontraditional situations should seek guidance and advice as to what the best way to file is,” said King. “Very likely blended families and nontraditional families are missing a lot of deductions because they’re not aware of what they could take and they don’t know if they’re not communicating with their ex what he or she is taking and what they’re eligible for. Sometimes people entirely miss an exemption because they haven’t spoken about it. Even if they’re not talking, they can put their accountants in touch and say, ‘It’s more beneficial for my client to take it this year and maybe your client to take it next year.’ For nontraditional families, there are a million issues. For biological traditional families, they can file jointly and probably never think about it again, but the choices for other than traditional families are large and can help or hinder your bottom line. You just want to make sure you have laid it all out and have gone back and found information about who is taking the child credit. It’s a complex world out there. See a professional.