Edward R. Weinstein, Esq.Edward R. Weinstein, Esq.

How Are Tax Exemptions Handled In A New Jersey Divorce?

Tax exemptions help parents provide and take care of their children. After a divorce here in New Jersey, many parents argue over who can take advantage of these exemptions. Due to my many years of experience as a divorce lawyer, I know exactly how and why a court will determine what parent should be awarded tax exemptions. Section 152(e)(1) of the Internal Revenue Code, gives a custodial parent the right to a tax exemption, subject to waiver by that parent. Therefore, the attorneys at my divorce law firm embrace that the Family Part of the Superior Court of New Jersey has the power to exercise authority to effectively allocate exemptions through the court’s equitable power. A court has the power to maximize the support a child receives and in doing so may, and actually should, recognize the beneficial impact of tax exemptions in adjusting the respective support obligations of each parent.  Following please find a case that addresses this issue. 

Renee Ann and Ronald Gwodz divorced in 1985. A property settlement agreement was incorporated into their final judgment of divorce. Even though the property settlement agreement contained a provision regarding federal taxes, it did not cover the allocation of income tax exemptions for the two children born of the marriage, Sandra and Jason. In 1986, a post-judgment motion resulted in support arrearages and a requirement that support payments be made through Probation. This order from 1986 also enforced a cost of living adjustment and imposed limitations on Ronald’s child visitation rights, pending a psychological evaluation of both parents and both children.

A year later in 1987, Ronald moved to secure unsupervised visitation with Jason, and visitation with Sandra under psychological supervision. He further requested that Renee be responsible to pay for Sandra’s counseling, for Jason’s additional counseling, and that Renee be compelled to attend counseling sessions without her new husband. Ronald also wanted a reduction of arrearages, to require that all medical claims be made through his insurance carrier, and be allowed to claim tax exemptions for both children. In her cross-motion, Renee requested continued psychological counseling, supervised visitation with Jason, proof that Ronald was receiving alcohol dependency and behavioral counseling, the establishment of additional arrearages and counsel fees.

On June 6, 1988 an order was entered which provided that each parent would be entitled to claim one child as an exemption for income tax purposes. Renee appealed the order, and argued that the court was wrong to allow Ronald to claim a child as a tax deduction and to provide that the children’s medical bills be submitted through his insurance carrier. The New Jersey Appellate Division started its opinion by stating that there were two questions presented by the tax exemption: (1) the authority of the court to make the order; and (2) the sufficiency of the record and findings in support of the court’s exercise of that same authority.

The New Jersey Appellate Division stated that while there were cases which held that exercise by a state court of the power to determine a federal tax exemption is in violation of federal constitutional and statutory law, they still disagreed with the applicability of those decisions. This disagreement was based on their recognition that federal courts and agencies must be the ones who interpret, consistently with the objectives of Congress, the federal tax statutes. However, according to the West Virginia Supreme Court of Appeals, the effect of the allocation of income tax exemptions for children by a state court is ultimately to alter the net income available for child support. A court has the power to maximize the net income and in doing so may, and actually should, recognize the beneficial impact of the exemption in adjusting the respective support obligations of each parent.

The New Jersey Appellate Division stated that Section 152(e)(1) of the Internal Revenue Code, gives a custodial parent the right to the exemption, subject to waiver by that parent. Therefore the appellate panel was satisfied that the trial court had the power to exercise authority to effectively allocate exemptions through the court’s equitable power. Still, the New Jersey Appellate Division was concerned with the failure of the trial court to consider or to quantify the effect of that exercise on each party, and the extent to which it would require reconsideration of the child support provisions of the judgment.

Furthermore, the trial judge should have considered the request for specific allocation of exemptions, not just as a call for resolution of an issue unconsidered in the settlement agreement, but in regards of the fact that the 1984 Internal Revenue Code amendments enumerated in Sec. 152(e)(1) were in effect when the judgment in this case was entered in 1985. As such, Ronald’s 1988 motion was actually a request for a change in the status quo in regards to exemptions, not just a resolution of an undecided question. Therefore, even though the New Jersey Appellate Division recognized the trial court’s legal right to equitably enforce an allocation of tax exemptions between the parents, subject to further modification if not accepted by the Internal Revenue Service, the appellate panel had no choice but to reverse the order and remand that specific portion of the order which provided for splitting the two tax exemptions be tried again. According to the New Jersey Appellate Division, in the new trial, the trial judge should consider evidence and make specific findings respecting the extent of child support actually provided by each parent, and if a change in tax exemptions is deemed appropriate, determine whether a modification to the existing support orders is required to reflect the benefits by the change. Furthermore, the New Jersey Appellate Division stated that the trial judge should also consider whether the change in exemptions falls within the principles of the 1980 New Jersey Supreme Court case of Lepis v. Lepis, because Section 152(e)(1) of the Internal Revenue Code was in effect at the time of the divorce judgment.

 Lepis v. Lepis, is one of the most paramount cases in New Jersey family law, and illustrates the proper procedure required for modifying support and maintenance arrangements after a final judgment of divorce has been entered. A showing of changed circumstances is required in the modification of both child support and alimony. Then, the court will consider both the finances of both parents, and the best interests of the children and determine a solution that is equitable to both parties.

As a general principle, a modification to the same obligation may be warranted in certain changed circumstances. A few examples of valid changed circumstances include: an increase in living cost; increase or decrease in the supporting spouse’s income; illness or disability; the dependent spouse living with another partner; or employment by the dependent spouse. Courts have consistently rejected requests for modification for temporary changes in circumstances, or expected changes that have not occurred. An increase in children’s needs due to maturing has also been held to justify and increase in support as long as the supporting parent is financially able.

Finally, Renee argued that the trial judge was wrong in ordering that the children’s medical bills be submitted to Ronald’s insurance company, and that this too, constituted a change which required an evaluation by the Lepis standards. The original agreement incorporated into the judgment of divorce provided that Ronald would pay half of Renee’s medical insurance as it applied to the children. Paragraph 9 of the agreement further provided that coverage could only be changed if Ronald’s coverage was as comprehensive as that then available through Renee’s employer. Therefore, the New Jersey Appellate Division held that the judge did not abuse his or her discretion in ordering that the children’s medical bills be submitted first to Ronald’s insurance. An unauthorized change was made in that the insurance that Renee wanted to use was that of her husband, not that of her own employer as contemplated by the agreement. Thus, the ruling of the trial judge about primary insurance submission of the children’s medical expenses was consistent with earlier court order, and did not constitute a Lepis change.

If facing a divorce, please do not hesitate to contact my office today.