Dividing Tax Benefits

Reply Sat 2 Feb, 2019 08:40 am
This question is how to divide the tax benefit for a child between two divorced parents. Let's take this Hypothetical situation...

1. Person A and Person B are divorced and share equal custody of a child. Under the law, either person can declare child as a dependent on their taxes (but only one). Declaring the child lowers the taxes of the person doing so... it not only gives a big exemption, it also allows the person to get favorable tax rates as "head of househould".

2. A pays B $12,000 in child support (which person A pays taxes on).

3. If Person A declares the child they get $5,000 in tax savings. (With the dependent they pay $8,000 in taxes. Without the dependent they must pay $13,000).

4. If Person B declares the child they get $1,000 in tax savings. (With the dependent they pay $0 in taxes. Without the dependent they pay $1,000).

5. Because of a previous legal agreement, Person A probably has the legal right to declare the child. There is some question to whether this actually applies...but it probably would and if it doesn't there is no agreement. But, I am writing this as an ethical question...

It seems obvious to me that Person A should declare the child as a dependent because the savings are significantly higher (does anyone disagree). The question is how much of these savings should Person A pay person B?

- The easiest answer is to treat the tax savings as a windfall. In this case Person A would take the savings and then give half of the savings to Person B. Personal A would declare the child on their tax form as give Person B $2,400 in case.

The weird thing about this is that the tax burden of B doesn't matter. In the case where B pays zero taxes and saves zero with a dependent... they still get $2,400 for nothing (something the IRS doesn't do).

How would you make this fair?
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Reply Sat 2 Feb, 2019 09:25 am
Asking this question in real life some people focus on the refund rather than on the amount of taxes paid. That doesn't make logical sense to me since the refund is just money the IRS has already taken... and the amount of money the IRS happens to have seized from your paycheck doesn't seem relevant to this calculation.

But, I guess I understand it. When paying zero taxes means getting a check for $1,000, the important number appears to be 1,000.

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Reply Sat 2 Feb, 2019 01:44 pm
From a philosophical point of view, the purpose of the government tax break is to offset some of the cost of raising the child. I see three ways of thinking about it. If you figure out what fraction each parent contributes to the cost of child rearing and mete out the tax benefit based on that, that sounds fair. You could also argue that each parent should contribute the same fraction of their income to child rearing and the fraction should should be determined based on that ratio. Yet another technique would to be for each parent to contribute an equal fraction of income after basic, non-child expenses.

Income 1: 80,000
Income 2: 40,000
Yearly cost of child rearing: 20,000

Technique 1, even split, each pays 10,000 and receives half the tax benefit.
Technique 2, parent one pays 13,300, parent two pays 6,700 and parent one gets 2/3 of the tax return, but if they are paying equally, then parent two is paying 25% of his income while parent two is only paying 12.5%, so if both are contributing 10,000, parent two should get 2/3 of the tax benefit despite making less money and paying less taxes.
Technique 3. Let's say basic living not counting the child is 20,000. Then parent one has 60,000 disposable, parent two has 20,000 disposable. In that scenario, parent one should pay 3/4 of the child rearing costs (15,000) and take 3/4 of the tax benefits. If both parents are paying equally (10,000), then parent one is paying 1/6 of his disposable income, parent 2 is paying half and so should get 3/4 of the tax benefit despite paying lower taxes.
Reply Sat 2 Feb, 2019 04:47 pm
Interesting Engineer.... you ignore the amount of the tax benefit for person B, and instead divide the greater tax benefit of person A.

Your solutions have an interesting side-effect.... person B can actually be hurt (i.e. end up with less money) by letting person A take the benefit. I was assuming that a "fair" solution would in any case benefit both people.
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Reply Sun 3 Feb, 2019 12:28 am
Which parent has the most time of custody of the child? As far as I'm concerned, they're the one who should list the deduction. If however the two agree that the other parent (the one with fewer custody hours and days) should list the deduction, then agree on an amount (dollars or percentage) of the refund/tax savings which will go to the primary custodian.
Reply Sun 3 Feb, 2019 12:43 am
In this hypothetical situation it is 50/50.
Reply Sun 3 Feb, 2019 12:47 am
The I'd figure to just split the savings down the center.
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