Q re: Income Tax claims with no sep. agreement.

[ForwardFromHere]

I googled this, and found an article on this site, and now I'm hoping to find out that it is recent or true.

My husband and I separated (he moved out) last May (09). We do not have any kind of separation agreement in place, and for now we just split his paycheque (I'm a stay-at-home-mom to 2 young children). He is claiming that I will have to claim the amount I received each month in excess of what the table child support is (which varied each month) as spousal support income as he is able to deduct it. Do I have to?

The article ("6 Ways to Reduce Your Income Taxes on Divorce") that I found on this site reads:

"Have a written separation agreement or divorce court order. You can reduce the burden of spousal support by deducting your payments from your income. However, you are only allowed to deduct spousal support payments if you have a written separation agreement or court order requiring you to pay spousal support. If you simply voluntarily pay spousal support, you cannot deduct your payments."

I was just wondering if anyone knows that this is true? Any similar situations? I suppose I could voluntarily claim the amount he wants to deduct, but why should I?

[billm]

You should do it because it reduces the total income tax for the whole family - why give the government more in total than you should? Simple.

No big deal just write up what you are doing and sign it - theres your agreement.

His idea that the amount over CS should be treated as SS is very sound. You should define the amount of CS (the table amount adjusted yearly according to income) and SS (what ever you can decide on) that he pays and and write that down. He should make two payments, one for CS, one for SS so that you can both keep track of it distinctly.

You can then file a form T1158 to register your agreement with CRA - checking the box that says the payments vary, and include a copy of your agreement.

[dadtotheend]

Your husband can't do it without your agreement.

If he makes significantly more money than you do, you can benefit as a group by agreeing with him. He will get a tax deduction at a higher rate than you will have to pay and the money stays in the family's hands (even the the family is no longer nuclear).

The thing is that he will have the tax savings in his hands. You should make a side deal with him that he will reimburse you for the taxes that arise you from including the SS in your income. And you should further agree to split the diffrence between what you have to pay and what he gets back.

Of course that can be risky for you because he could reneg and then you would be left standing with an extra bill.

[ForwardFromHere]

Thank you for your response.

My issue with that would be that I would not sign anything haphazard with regards to what we are presently doing, since it is not something I have agreed to. It is my intention to ask for more $$ in spousal support in order to remain home with my children (as we agreed to during our marriage) until they are school aged. I do not agree to the amount he is presently paying, and it has not been a defined nor fixed amount (no definition between child vs spousal). He has only recently retained a lawyer himself, and the amount of spousal support will be one of the issues we will be dealing with through lawyers. I don't like the thought of agreeing to claim something and finding out that it will bite me in the a$$ later.

[ForwardFromHere]

Thank you DadToTheEnd. That was what I was wondering, if he needed me to agree.

I agree it makes sense to not give the government more money, but I'm too concerned about the affect it will have on me in the long term with regards to a separation agreement and the amount of spousal support I will receive.

[dadtotheend]

Right now you are being paid an uncharacterized amount of support. The Income Tax Act allows for limited relief on uncharacterized support.

In recognition that you are getting support on an interim basis without having yet settled your differences, your agreement or court order can have a clause that characterizes the support payments made in the year the agreement is signed or the preceding year to be SS.

My suggestion will only work when the parties are willing to be reasonable and amicable. There is no question that you will benefit as a group by doing it. But he has to be willing to share the windfall with you and you have to trust him to do it.

If the parents are not getting along and/or not trustworthy, then they will cut off their noses to spite their faces and the other 35,000,000 of us will benefit from the extra money that goes into the tax pot.

[Mess]

The thing is that he will have the tax savings in his hands. You should make a side deal with him that he will reimburse you for the taxes that arise you from including the SS in your income. And you should further agree to split the diffrence between what you have to pay and what he gets back.

Why on earth would he agree to that. Tax law says that he gets the deduction for the SS, she declares it as income.

Spousal support amounts are calculated with the understanding that the payer gets a deduction and the receiver declares it as income. If you hand the tax refund over to the receiver, they are getting more than the table amount. That would be absurd.

She can try to negotiate whatever she wants but there's no reason why he should agree to that. His tax refund is his tax refund, not hers.

There is no "windfall" as far as his tax refund goes. He is paying out far more spousal support than he will ever receive as a tax return. The SS is her income, as per tax laws. It is just flowing through his account, it never ends up being his income, that's why he gets a deduction.

And note, I'm arguing this as a receiver of SS. If you want the relationship to be amicable this is exactly the sort of negotiation you should avoid.

[today]

The flip side is he may simply just start paying cs only and force her/you to apply through the courts for ss, which is not guaranteed. If it was me I would agree and if you are looking for more ss then apply for it.

[today]

If I understand correctly it would difficult to get more than a split of his earnings in any case.

[dadtotheend]

Why on earth would he agree to that. Tax law says that he gets the deduction for the SS, she declares it as income.

I'm a tax accountant. People often say to me, "I need a write off" and I tell them that I would be happy to triple their bill, it's write off for many of them. Then they get it. What they are really saying is that they want to write off more of what they're already spending. I would never spend a buck just to save 30-45 cents in tax.

I'm not suggesting that he pay more than then he already is. I'm saying that they characterize tabled CS as SS and create tax savings. And even if they do decide to create extra SS, she could reimburse him for all the SS on the side and they could split the tax savings. It's an income splitting technique.

[billm]

Why on earth would he agree to that. Tax law says that he gets the deduction for the SS, she declares it as income.

Spousal support amounts are calculated with the understanding that the payer gets a deduction and the receiver declares it as income. If you hand the tax refund over to the receiver, they are getting more than the table amount. That would be absurd.

She can try to negotiate whatever she wants but there's no reason why he should agree to that. His tax refund is his tax refund, not hers.

There is no "windfall" as far as his tax refund goes. He is paying out far more spousal support than he will ever receive as a tax return. The SS is her income, as per tax laws. It is just flowing through his account, it never ends up being his income, that's why he gets a deduction.

And note, I'm arguing this as a receiver of SS. If you want the relationship to be amicable this is exactly the sort of negotiation you should avoid.

Thanks for saving me the typing Mess - well put.

Also, there is a problem with you (you meaning ForwardFromHere) worrying about reporting what is actually happening - he is paying the correct CS, the rest should be declared as SS for tax purposes, this is the current arrangement, whether you want more or not is not the issue, you should report it as SS on your taxes because that is what it is. It does not mean you agree with it, it only means that is what is happening currently and if you refuse to report it, then I don't agree with your reasoning or justification.

[dadtotheend]

...you should report it as SS on your taxes because that is what it is.

It most certainly is NOT SS. Until the matter is settled by agreement or order, it remains uncharacterized. The Income Tax Act does not require the use of the Federal Child Support Guidelines. It doesn't call any extra amount over the table amount SS.

It is only SS when they agree in writing or a court orders it. It is not SS just because it is the portion that exceeds a guideline amount.

They are free to depart from the table amount of CS if they wish and call the whole thing SS if they want. As long as the overall level of support being paid is sufficient to meet the children's needs, no family law judge is going to care what they call it, CS or SS, so there won't be a problem there.

It is only taxable to the recipient and deductible to the payor if made pursuant to a written agreement or court order. If he tried to deduct it, it will certainly be reviewed by the CRA and denied. On the other hand, the CRA won't automatically reassess her income to remove the SS.

When they settle, the agreement can characterize some of the payments in the year or the previous year as SS. Only then should she report (or ask for an adjustment to the previous year's return) the amount as SS.

[dadtotheend]

Truth be told, this is a huge opportunity for income splitting, but battling ex's are usually unable to get past the emotions to take advantage.

In an extreme, consider a top tax rate income of well over $125K and a parent who is primary caregiver of two children with no income other than the support.

The primary caregiver parent has a basic exemption of $10K, an eligible dependant claim of $10K and an exemption for children under 17 of $4K, so total exemptions are $24K.

The support payer can now pay up to $24K in SS to the recipient spouse and can get a 45% tax deduction and the recipient pays zero tax. An additional $16K in SS can be paid to the recipient which will attract tax at 20% and save the payer 45%. And they agree to $0 CS.

So on $40K of support, the recipient pays $4K in tax, and will lose $3K in CTB due to the SS income inclusion, and the payer saves over $18K. It sure would be nice if they could agree to have the payer spouse pay the recipient's tax bill and find a way to split the $11K in tax savings.

They could make things more definite by agreeing on the side to put the tax savings in an RESP and to include a termination date on the SS of when the kids finish high school. The RESP can then pay for their higher learning.

[billm]

It most certainly is NOT SS. Until the matter is settled by agreement or order, it remains uncharacterized. The Income Tax Act does not require the use of the Federal Child Support Guidelines. It doesn't call any extra amount over the table amount SS.

It is only SS when they agree in writing or a court orders it. It is not SS just because it is the portion that exceeds a guideline amount.

They are free to depart from the table amount of CS if they wish and call the whole thing SS if they want. As long as the overall level of support being paid is sufficient to meet the children's needs, no family law judge is going to care what they call it, CS or SS, so there won't be a problem there.

It is only taxable to the recipient and deductible to the payor if made pursuant to a written agreement or court order. If he tried to deduct it, it will certainly be reviewed by the CRA and denied. On the other hand, the CRA won't automatically reassess her income to remove the SS.

When they settle, the agreement can characterize some of the payments in the year or the previous year as SS. Only then should she report (or ask for an adjustment to the previous year's return) the amount as SS.

You are technically correct dadtotheend - she can say all of it is uncharacterized and she can't be forced to report it as income. However she can be reasonable and cooperative and simply write down what they are doing and proportion some of the support as SS and some as CS and report the SS as income. It would be very reasonable to proportion his CS table amount as CS, and the rest as SS. The only reason to not do it that way is to play games and stress out the situation as a negotiation or revenge tactic, which is not a mature and ethical way to proceed.

[ForwardFromHere]

Thank you for your responses. I can see how it makes sense from a tax savings point-of-view, but I don't trust this person as far as I could throw him, and trying save/get money from a tax refund to split with him is just not a high priority. If he agreed to put the entire thing towards the $16K he put on my credit card without my knowledge, then we might have a deal. Otherwise, I don't care about the money it might save. I doubt I'll see a drop of it. I know he thinks he's pulling the wool over my eyes suggesting I have to claim. I'd rather the other 35,000,000 of you have it (you're welcome), since he cut his nose off long ago.