I’M MARRIED, BUT SEPARATED… WHAT IS MY FILING STATUS?
TAX EXEMPTIONS & CREDITS
The impact of a person’s filing status also affects other tax issues. The custodial parent is not only able to file as Head of Household, but also may be eligible for the Earned Income Credit. The custodial parent is also entitled to the dependency exemption. There is a link between the dependency exemption and the Child Tax Credit. The Child Tax Credit can only be received by the person who claims the dependency exemption. Therefore, the dependency exemption and the tax credit cannot be split between the parties.
Also, the Earned Income Credit and the Additional Child Tax Credit are refundable credits. This is important in bankruptcy cases (especially Chapter 7 cases) because tax refunds are bankruptcy assets, and these two refundable credits protect that portion of the taxpayer’s refund when determining what, if any, portion of the tax refund is required to be turned over to the trustee.
SPOUSAL SUPPORT (ALIMONY)
Sale of stock and liquidation of retirement accounts are taxable events where many clients encounter tax problems. On the sale of stock, taxpayers fail to account for the adjusted basis in the stock to determine the true recognition of gain or loss. And many tax clients who liquidate their 401(k) or individual retirement accounts do not withhold enough (if any) federal or state income taxes and they fail to account for any penalties associated with the early withdrawal. At Sheppard Law Offices, Kenneth L. Sheppard, Jr. assists these clients by amending their tax returns to correct the deficiencies.