Author: Irving Mangurten, Principal
While divorce isn’t something that any couple aspires for going into a relationship, it is something that winds up happening more than we would like to admit.
You’ve probably heard the number 50% of marriages end in divorce statistic thrown around, and while that isn’t exactly accurate, the number of divorces in the US is tremendous with one taking place every 13 seconds.
Suffice it to say, Divorce Happens. If it happens to you, a friend or loved one, there are some important financial considerations, especially as it pertains to divorce where there are children (dependents) involved.
As a CPA and Advisory Firm, we work closely with businesses, their owners and individuals in all walks of life. With a wide base of clients, divorce is one of those unfortunate circumstances that we see from time to time. And while we cannot help our clients with these difficult personal matters, we do take tremendous pride in helping our clients deal with the financial related changes that occur when a divorce takes place.
The financial review required during divorce can be exhaustive, causing even the simple items to be missed which can have a material financial effect on one or both parties involved.
In this post, I want to discuss the importance of finalizing and receiving sign-off on form 8332 at the time in which a Divorce Decree is executed.
For those not familiar, Form 8332 is required in cases where a non-custodial parent seeks to claim a dependency exemption on their tax returns.
For example, if in the divorce decree there is an agreement that the non-custodial parent is to receive the dependency exemption in certain years, the IRS is going to be looking for an 8332 to be included with their income tax submission. If the non-custodial parent checks the box that indicates that the dependent does not live with them yet tries to claim the dependent, a computer generated red-flag will go up with the IRS. And even though there is a decree saying that this has been agreed upon, without Form 8332, the exemption often will be rejected.
The Financial Implications of the 8332
So what is the financial impact of not signing the 8332?
The current deduction per dependent is $3900.00. So if for instance the decree stated that dependency would be claimed by the custodial parent in even years and the non-custodial in odd years, this could amount to lost deductions of nearly $20,000 per child per decade. Just imagine if there are several dependents?
Can the 8332 be Executed Later?
The short answer to this question is yes. The 8332 can be signed post decree, however, based upon my experience it isn’t always so easy to obtain after the fact.
Just recently a client of mine who had a decree with opposite year dependent rights (for tax purposes) came to me asking if there was another way to take the deduction without form 8332. The ex-couple had a further falling out and the non-custodial parent was unable to get the form from their ex. Even though it had been agreed upon, the client told me it just wasn’t going to happen.
In this case, as the CPA firm we are able to submit a special request on behalf of the client, however this takes time at the clients expense to do. Further this doesn’t guarantee acceptance, but only a request.
What is also important to note is that the form is generally spelled out specifically in the decree meaning your client’s attorney should be working to get this done, however because so much exchange is taking place during a divorce it just happens to be missed all too often.
Why it is Best to Sign the 8332 at the Time of Decree
While we can only hope that following a divorce that things are for the best for the couple and the children, but as we all may be too aware, relationships following a divorce can change. Much like my client who was unable to get the 8332 after the fact, this could happen to anyone.
At the time of the decree there is much at stake relating to child care, maintenance and other commitments from both parties. This makes it the ideal time to ask for sign off on important documents like the 8332.
Irv Mangurten is a Principal at Bronswick, Reicin and Pollack. To learn more about Irv or to reach him for a consultation click here
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