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Value of Dependent on taxes

Discussion in 'The Okie Corral' started by Jon_R, Apr 18, 2012.

  1. Jon_R

    Jon_R

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    Getting divorced, my plan was I claim the three kids on my taxes as I am providing 72% of their support. Ex is asking that she claim one of them on her taxes. We are in negotiations. Already filed for 2011 so this would be for 2012 and beyond.

    Question is I am trying to put a rough value on the cost of a dependent as it relates to federal income tax so I can answer her request. In researching it in my situation I don't see that it matters to much but wanted to double check so let me know if I have my basics right.

    A dependent is worth $3650 a year on your taxes. This $3650 comes off your adjusted gross income and not of your total tax liability. As your income goes up this becomes a much less impact.

    For example if your AGI before dependents is $36500 then a dependent lowers your AGI 10%. If you AGI is $150000 then a dependent only lowers your AGI about 2.5%. Granted it lowers it 2.5% at a higher tax rate but the real dollar delta is lower as your AGI goes up.

    I think this is what they mean when they say a deduction is above or below the line. I believe deductions for dependents is above the line.

    In my case I thought a deduction was worth $3650 per kid in tax saving but what I found out with my numbers is a kid is worth $800 a year in tax savings to me so about $65 a month.

    Does this make sense to people who know or did I make a serious flaw?
     
  2. Bren

    Bren NRA Life Member

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    All I know is, even at $3,650, compromise like that is how you get the PSA signed and the divorce done. I'd agree to it.
     
    Last edited: Apr 18, 2012

  3. Jon_R

    Jon_R

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    Just trying to figure out what I am agreeing to. It is one of many issues measured in thousands of dollars a month. I prefer to not sell my house etc.... Fun Fun Fun. I might offer one kid for tax break but kid comes with taking over their college fund payments.
     
  4. Halojumper

    Halojumper

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    If you're providing for 72 percent, that's just over two thirds so her asking for one third is probably reasonable.
     
  5. Jon_R

    Jon_R

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    72% plus health insurance, car insurance for oldest, truck for oldest, college funds, etc... :crying:Just trying to figure out if I am making a $800 concession or $3600 concession.
     
  6. 220-9er

    220-9er

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    The flaw in your logic is that when your income goes up, your marginal tax rate goes up too. It may be a smaller percentage of your total income but the dollar amount is larger with a higher income.
    This issue should have been worked out in your divorce anyway.
    You will need to read the instructions or ask an accountant because this may be an issue the IRS writes the rules for. She may unable to legally claim the deduction if she isn't the one actually paying the money.
     
  7. Brucev

    Brucev

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    Doesn't matter how much support you provide. If she has custody and claims the children, you are starting in a hole. That's just he way it is. This is equitable given that after a divorce most women see a drop in income and most men see a increase.
     
  8. Bilbo Bagins

    Bilbo Bagins Slacked jawed

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    +1

    For what I gathered when playing with Turbo tax, the more money you make, the less money you get back for each dependent.

    For my family to pay as little as possible in taxes, my wife and I file seperate, and since she make less money, she claims the kids.
     
  9. Jon_R

    Jon_R

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    We are working out the issues trying to make it an uncontested divorce. This is a point of negotiation for the paperwork to file for divorce. I am not divorced and have not filed for divorce. IF we can agree on everything it goes much smoother as an uncontested divorce. If we can't then it is contested requiring mediation, judges, and maybe all the way to court...
     
  10. Jon_R

    Jon_R

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    It is a line item on the paperwork for filing for divorce. If the divorce settlement specifies who will claim who then it is a court order that must be followed. I am likely going to concede on the point but I want to know what it truly means in dollars and cents before I do. My assessment is dependents lowers you AGI above the line. So saving $3650 above the line at a 25% tax rate saves you $912 a year not to big of a deal. If it is below the line then it would save $3650 per year which is significant it is basically a decent car payment a month. I thought it was below the line but now think it is above the line.
     
  11. 220-9er

    220-9er

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    Since this is going to mean real money to you in the long term I would pay a CPA for an hour of their time and be sure you get the correct answer and amounts. Money well spent.
     
  12. Jon_R

    Jon_R

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    Ironic part is she is preparing for her CPA exam and finishing her Masters in accounting.....

    I might use another CPA though not sure how long term as my oldest is 16 and my twins are 14.
     
  13. Old School

    Old School

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    Make sure you claim the 14 year olds and she gets the 16 year old. Reason being that you will likely be able to claim the younger kids for a longer period of time.
     
  14. Jon_R

    Jon_R

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    That is what I will propose. Looks like the bigger issue to me is just changing the box on the 1040 from Married to Single costs me an extra $4.5K a year....
     
  15. LoadToadBoss

    LoadToadBoss IYAAYWOT

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    Even though the divorce agreement may specify who can claim the children as dependents on the tax return, if your ex is the domiciliary parent, then she will need to release the dependent exemption to you using the IRS Form 8332. The IRS is not obligated to follow the courts ruling in matters of divorce. IRS says that the parent with whom the child resided for more than half the year gets to claim the dependency exemption. Make sure the divorce decree specifies that she is required to sign the form, that way if she refuses and claims the kids when she's not supposed to, you can take her back to court for breech of the divorce decree. Make sure that the divorce decree doesn't have any caveats like, "provided he is current on child support payments" or such verbiage.
     
    Last edited: Apr 18, 2012
  16. Brucev

    Brucev

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    Hope it works out in a manner that is best for all concerned.
     
  17. Wolfgang

    Wolfgang Millennium Member

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    You file "Married filing separate"? or One single; her "head of household"?

    Married filing separate is the worst way to file.

    I don't know anything about taxes.