Juan and Maria, who have two young children, are in the process of obtaining a divorce. Juan expects to have $250,000 of income each year while Maria expects to have $180,000 of income each year. Assume the children will live with Maria after the divorce and that Juan will pay child support. What advice can you provide them regarding the child credit?
Juan and Maria, who have two young children, are in the process of obtaining a divorce. Juan expects to have $250,000 of income each year while Maria expects to have $180,000 of income each year. Assume the children will live with Maria after the divorce and that Juan will pay child support. What advice can you provide them regarding the child credit?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Juan and Maria, who have two young children, are in the process of obtaining a divorce. Juan expects to have $250,000 of income each year while Maria expects to have $180,000 of income each year. Assume the children will live with Maria after the divorce and that Juan will pay child support.
What advice can you provide them regarding the child credit?
The child credit is phased out for single taxpayers with AGI above
$400,000.
Juan will be entitled to the child credit because his income is below the threshold. The credit is only available to taxpayers who claim the children as dependents, so it would be beneficial to allow Juan to claim the children. The tax savings received by Juan should be considered when the amount of child support that Juan must pay is being determined.Juan's AGI exceeds
$200,000,
but Maria's AGI does not. The child credit thus would be reduced if Juan claims it, but there would be no reduction if Maria claims it. Overall, the tax savings are larger if Maria claims the child credit, so it would be better to not have a written agreement allowing Juan to claim the children as dependents. However, Juan may not be willing to pay as much child support if he foregoes any child credit.The child credit is available to all taxpayers regardless of income level. Juan will be entitled to the child credit and to claim the children as dependents because he will be providing more than one-half of his children's support by paying child support.
The child credit is phased out for married taxpayers with AGI above
$200,000.
Juan will not be entitled to the child credit because of his high income. Maria will be entitled to the child credit since the children will live with her, even though it has been determined that Juan will claim the children as dependents.Part 2
Requirement b. What advice can you provide regarding tax rate schedules?
Juan and Maria will both file as head of household. Maria qualifies because she is the custodial parent and Juan qualifies if he claims the children as dependents and claims the child credit.
If Juan claims the children as dependents, Maria will have to file as a single taxpayer. Even though Juan is not the custodial parent, he will file as head of household.
As the custodial parent, Maria is entitled to file as a head of household. This is true even if she does not claim the children as dependents. Juan will file as a single taxpayer.
Juan and Maria will both file as single taxpayers. Neither will qualify for head of household status.
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