When looking at a divorce settlement, the entire package should be reviewed as a whole, because all too often, the different parts affect each other. One of these parts is the parenting plan. People tell me “we want to share the children 50/50”, which is wonderful. Both parents should be in the lives of the children. However, when calculating the number of overnights, most years have 365 days. Therefore, one parent will have the child one more day each year. The person who financially contributes the most to the child (generally the parent with the most overnights) gets to have the Head of Household designation, which can help reduce income taxes. If there are two or more children, each parent could have at least one child designated one more overnight each year, and thus both could have Head of Household. The Child Exemption can be used either parent, and traded off between the years. So –being really insistent on having the child or children on precisely the same parenting schedule can potentially increase the taxes paid by one person.
Other related settlement parts are those of child support and maintenance (formerly called alimony). Neither child support nor maintenance is dismissible in bankruptcy proceedings. However, maintenance is deductible by the payer and taxable to the payee on their respective income taxes. Child support has no tax-deductible status. Child support is reduced by the amount of maintenance paid, but there are other very arcane tax traps, such as maintenance recapture (where maintenance payments are not deductible) and other tax oddities waiting to snare the unwary. Be sure to consult with a qualified divorce consultant, divorce financial analyst or a CPA who is fully aware of all of the unusual rules to avoid tripping yourself up in a tax trap