United States: The Dependency Exemption In Divorce

Last Updated: February 8 2016
Article by Leslie B. Spoltore

In a prior blog post I discussed the Delaware Family Court decision issued in the case of L.S. v. L.R.S., 2007 WL 4793935 (Del. Fam. Ct. Jan. 17, 2007), which held that the right to claim the Federal Tax Dependency Exemption ("exemption") available through Internal Revenue Code Section 152(e) is an asset that can be allocated in the context of a property division proceeding. While the decision in L.S. v. L.R.S. determined that the exemption is a divisible asset, it did not set forth in detail the factors the Court should consider when determining how to allocate the exemption. A later case, S. v. S., 2012 WL 1560401 (Del. Fam. Ct. Mar. 26, 2012), provided further guidance in the form of a list of seven (7) factors for consideration. That list of factors may be found here. Since my last post, another decision has issued from the Family Court and since it is tax season, it seems an appropriate time to revisit the exemption issue.

In the case of E.K. v. M.K., 2013 WL 8290634 (Del. Fam. Ct. Mar. 8, 2013), Husband wanted the Court to allocate the exemption for the parties' two children. Wife, who had primary residential placement of the children, wanted the Court to refrain from allocating the exemption. Finding in favor of Husband, the Family Court referenced the holding in S. v. S. and conducted its analysis as follows:

To bolster her position that the Court should not divide the dependency exemptions, [counsel for Wife] argues that the Court should rely on S. v. S, where the Court refrained from allocating the dependency exemption based on 'the facts unique to this case, including the young age of the children, the unsettled custody of the children, and the nearly equal incomes of the parties.' While the parties' incomes are not equal in this case, [counsel for Wife] contends that there are too many variables to justify awarding Husband a tax benefit, and that allocating the exemption 'in the face of a potentially fluid situation would render an inequitable result.' Rather, [counsel for Wife] requests that the Court defer to the federal and state default provisions.

The Court is not persuaded that potential fluidity of custodial arrangements and respective incomes should lead the Court to refrain from allocating the exemptions in a manner that would produce tangible benefits for both parties. In dividing marital property, the Court considers statutory factors at the time the property division is to become effective. Many of the factors, such as the health, station, and sources of income, the opportunity to acquire future assets and income, the value of the property set aside to each party, and the parties' economic circumstances, can change over time. In addition, the statute requires the Court to consider the parties' economic circumstances 'at the time the division of property is to become effective [emphasis added].' All of these considerations are fluid, but the Court will not reopen a property division because one of the statutory factors has changed. In addition, in evaluating the parties' prospects to acquire future income, the Court necessarily has to forecast parties' future prospects to acquire assets and income. When evaluating this statutory factor, it is possible that the party whom the Court believes has a lesser prospect to acquire future assets and income may in fact acquire more assets and income in the future.

Given that the Court will allocate the exemption, it will award the exemptions in a way that is most beneficial for both parties. Allocating the exemption in a way that maximizes the net income to the parties is consistent with the purpose of the Delaware divorce code of mitigating the potential harm to spouses and children. Moreover, other jurisdictions allocate the exemption in this manner. For example, the New Jersey Superior Court has held that 'a court may properly seek to maximize the net income of the parties in the allocation of tax deductions.' As a New Mexico Court has noted, 'allocating a dependency exemption to one parent or the other may, as a practical matter, liberate additional funds with which that parent can contribute more to the support and maintenance of the children.' Often times, allocating the exemption to the non-custodial, economically stronger spouse will produce more tax savings than allocating the exemption to the custodial parent. By doing this, the Court can use the exemption to serve a constructive purpose of helping the parents provide for children of a divorce. (citations omitted) Id. at 18-19.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Leslie B. Spoltore
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