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Tax law changes may create tangle in divorces
Divorce, often a messy business, is about to get messier.
The $350 billion tax cut creates a number of issues for divorced or divorcing couples, ranging from splitting investment assets to deciding who should claim children as dependents on tax returns. Divorced couples who haven't spoken for months may need to reconcile long enough to cash their advance child tax credit check, due to hit mailboxes later this summer.
Divorcing couples who ignore the changes in tax law "are shortchanging themselves," says Bruce Richman, a partner with accounting firm BDO Seidman and author of Guide to Tax and Financial Issues in Divorce. If you're getting a divorce, some issues to consider:
 Capital gains tax reduction. The top capital gains tax rate was reduced to 15% from 20%. That means investments have a greater after-tax value, which could affect the way some couples divide their assets, says Bob Scharin, editor of RIA's Practical Tax Strategies.
Suppose a couple agrees to split their assets, with one taking cash and the other taking mutual funds and stocks. In a typical divorce settlement, the first spouse receives a smaller amount in cash than the market value of the securities, assuming they've increased in value. The reason: When the second spouse sells the securities, she'll have to pay taxes on the gains, reducing their overall value. The cut in capital gains taxes increases the after-tax value of the securities, which means the first spouse may be entitled to more cash, Scharin says.
Meanwhile, the reduction in taxes on stock dividends to a maximum of 15% from a top rate of 38.6% could affect negotiations about spousal support, Richman says. If the spouse receiving alimony also earns income from dividends, the amount of alimony may be reduced to reflect the increase in after-tax investment income, he explains.
 Marriage penalty relief. In the past, many separated couples scrambled to finalize their divorce by Dec. 31. That enabled them to avoid filing jointly for the year and dodge the marriage penalty, which typically affects dual-income couples that earn similar salaries.
Thanks to the tax cut, some couples may want to reconsider their rush. The new law reduces or eliminates the marriage penalty for some dual-income couples by increasing their standard deduction and widening the 15% tax bracket. Couples who take the standard deduction instead of itemizing could end up paying less as a married couple than they would as singles, Scharin says.
The change won't benefit all couples, so run the numbers before deciding how to file. And if you suspect your spouse of taking questionable tax deductions, file a separate return, even if it means paying a higher tax bill. Otherwise, you could be held liable for back taxes and penalties.
 The child tax credit. The tax cut increases the child tax credit to $1,000 from $width=454 per child for 2003 and 2004. The credit is restricted to eligible parents who claim children as dependents on their tax returns.
Divorcing parents should consider which parent will benefit most from the tax credit, tax analysts say. If one spouse earns too much money to qualify for the tax credit, it may make sense to allow the other spouse to claim the children as dependents.
Splitting the check
In late July, the IRS will start sending out checks to eligible parents, representing an advance payment on the increase in the child tax credit. Qualifying parents will receive $400 per dependent child.
While most parents will welcome the check, the payment could create some hassles for divorced parents. Among them:

  When your money will arrive

Most of the $400 advance child tax credit checks are scheduled to be mailed to eligible parents from July 25 to Aug. 8. When you receive your check will depend on your Social Security number.

Last 2 digits of SSN

Date check mailed from Treasury

Estimated number of checks

Estimated dollars


July 25

8.6 million

$4.4 billion


Aug. 1

8.4 million

$4.3 billion


Aug. 8

8.4 million

$4.3 billion

Source: IRS

 The IRS will calculate payments based on 2002 tax returns, so parents who claimed qualified dependents in 2002 will receive the advance payment for 2003. That's a problem for parents who take turns claiming children on their tax returns, a feature of many divorce settlements. For example, a mother who claimed a child in 2002 will get the advance payment, even if the child's father has the right to claim the child in 2003.
 Couples who filed a joint return for 2002 will receive an advance payment addressed to both parents, even if they've divorced since then.
If the check is made out to both parents, both will have to endorse it before it will be cashed, the IRS says. If you haven't spoken to your ex since you signed the divorce papers, now may be a good time to make a friendly phone call.

Published: 6/24/2003 1:58 AM                                                 All divorce news
Please read more related legal information:
Uncontested Divorce Online Legal Information
Uncontested Divorce Frequently Asked Questions


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