Ask a Mediator- by Roy H. Andes, M.A., J.D.
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Originally published: 9/10/98

Sharing Tax Exemptions on the Kids-- Three Formulas

At the time of divorce, many court decrees decide which parent may claim the annual income tax exemptions for the children.  In mediation, often spouses prefer to allocate the exemption each year to minimize taxes and then share the tax savings between them. Following is a brief discussion of how to do that, and a description of the three most common formulas for sharing the benefits of the income tax exemption.

In order to use any of these formulas the following must be true:

  1. You will be divorced, and living separately.
  2. Both parents will be qualified to claim the exemptions under the tax law for the year in question (either directly, or by consent on IRS Form 8332).
  3. Each parent computes their annual taxes twice, once taking the exemption, once not taking it.
  4. Your divorce decree will provide that the annual income-tax exemption for dependant children may be claimed by the parent to whom it provides the greatest tax savings.
  5. The decree will also provide that the former spouses share the tax benefits by making a single child support adjustment payment annually from one parent to the other (using one of the following formulas).
  6. Tax law in effect at the time will exempt that payment from taxation as an adjustment to child support.

The question is, what formula should you choose for your Agreement for computing the adjustment payment between the spouses? Three of the most common follow:

1. Half-benefit- The parent claiming the exemption shall make a once-annually transfer of half of the amount of that parent's tax saving to the other. Advantages: Simple, easy to compute. Disadvantages: sometimes arbitrary. (see examples below).

2. Restoration-share- The parent claiming the exemption shall make a once-annually transfer to the non-claiming parent of the following sum: an amount equal to the tax savings the non-claiming parent would have saved had he/she claimed the exemption. Advantages: Simple. Fairest for couples with widely divergent tax liabilities. Disadvantages: the most arbitrary, bad for couples whose tax bites are expected to be about the same.

3. Proportional share- Each parent gets a proportional share of the tax savings they would have had, using the following formula:

(NxS) / (N+S) = T

Where:
S = Claiming parent's tax savings
N = Non-claiming parent's tax savings (if they'd claimed the exemption)
T = amount of transfer payment from Claiming to non-claiming parent

Advantages: Most consistently fair distribution. Disadvantages: More complex computation. (See examples)

Tax Exemption Examples

Example #1-large advantage for husband
Total taxes of both husband & wife:
If exemption claimed by wife:  $600
If exemption claimed by husband:  $190
Taxes paid by each: Wife Husband
with the exemption $0.00 $150.00
without the exemption $40.00 $600.00
Taxes each would save: $40.00 $450.00

Who should claim the exemption?: Husband

Formulas for Sharing this tax savings between ex-spouses:
Half benefit: Person claiming exemption pays ½ their benefit to the other: Claimant (husband) keeps $225, and pays the other (wife) $225.
Restoration share: Person claiming pays the other their expected tax benefit (as if they'd claimed): Claimant (husband) keeps $410, and pays the other (wife) $40.
Proportional share- per the formula: (NxS) / (N+S) = T. Each keeps a proportional share of their expected tax savings: Claimant (husband) keeps $413, and pays the other (wife) $37.

Example #2- moderate advantage for husband
Total taxes of both husband & wife:
If exmpt. claimed by wife:$535
If exmpt. claimed by husband:$430
Taxes paid by each: Wife Husband
with the exemption $35.00 $250.00
without the exemption $180.00 $500.00
Taxes each would save: $145.00 $250.00

Who should claim the exemption?: Husband

Formulas for Sharing this tax savings between ex-spouses:
Half benefit: Person claiming exemption pays ½ their benefit to the other: Claimant (husband) keeps $125, and pays the other (wife) $125.
Restoration share: Person claiming pays the other their expected tax benefit (as if they'd claimed): Claimant (husband) keeps $105, and pays the other (wife) $145.
Proportional share- per the formula: (NxS) / (N+S) = T. Each keeps a proportional share of their expected tax savings: Claimant (husband) keeps $158, and pays the other (wife) $92.

Example #3- small advantage for husband
Total taxes of both husband & wife:
If exmpt. claimed by wife: $225
If exmpt. claimed by husband: $215
Taxes paid by each: Wife Husband
with the exemption $0.00 $35.00
without the exemption $180.00 $225.00
Taxes each would save: $180.00 $190.00

Who should claim the exemption?: Husband

Formulas for Sharing this tax savings between ex-spouses:
Half benefit: Person claiming exemption pays ½ their benefit to the other: Claimant (husband) keeps $95, and pays the other (wife) $95.
Restoration share: Person claiming pays the other their expected tax benefit (as if they'd claimed): Claimant (husband) keeps $10, and pays the other (wife) $180.
Proportional share- per the formula: (NxS) / (N+S) = T. Each keeps a proportional share of their expected tax savings: Each keeps a proportional share of their expected tax savings: Claimant (husband) keeps $98, and pays the other (wife) $92.

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