Tax Form Can Help In Divorce

Dear Liz: I have been divorced for a few years. The divorce decree says I get to claim my daughter as a dependent and my ex is supposed to claim my son. The problem is that my ex beats me to the tax man every year and claims both children. What can I do to stop this?

Answer: You've learned that a divorce decree is typically binding only on the parties that agree to it – and the Internal Revenue Service wasn't one of those parties.

To figure out your options, I consulted enrolled agent Eva Rosenberg, who runs the Tax Mama.com website.

The best way to protect your right to claim your daughter as a dependent is to have your ex-husband sign IRS Form 8332 waiving his right to claim her – and you will need to fill one out releasing your claim to your son. You need to fill out a separate form for each child.

Ideally, this would have been handled as part of your divorce.

"It really surprises me that divorce attorneys don't automatically include Form 8332 as one of the documents to be signed whenever child support comes into play," Rosenberg said.

If you can't get your ex-husband to cooperate, you're not out of options. If your daughter lived with you for more than half the year and you provided more than half her support for the year, and you can prove both facts, Rosenberg recommends you "go ahead and file your tax return on paper, the old-fashioned way."

The IRS will challenge you, but if you can defend your position, you can prevail.

On the other hand, if you only provided support but your daughter did not sleep under your roof for at least 183 days (or otherwise met the "living with you" standard outlined in IRS Publication 501), you will lose the exemption.

"This is where getting that Form 8332 signed at the time of the divorce is so critical," Rosenberg said. "Without it, in a dispute, you lose. Sorry."

Dear Liz: I have a student loan that is about $40,000. Back when interest rates were high, I consolidated my loans at 8.25 percent for 20 years. If I pay the loan for 20 years, my payments will equal $80,000. I do not want to use our home equity to pay off this loan as my wife and I want to sell our home to purchase a new one. My wife is really having a hard time with this and any help would be greatly appreciated. Can student loans that were consolidated when interest rates were high be refinanced with today's lower rates?

Answer: The short answer is no: You get only one bite at that particular apple.

Although you can't consolidate again, some people have lowered their rates by refinancing student loan debt into home equity loans – which you don't want to do – or by transferring their debt to low-rate credit card offers. That's an extremely risky way to go.

No doubt it's annoying to pay 8.25 percent when the Stafford student loan rate has dropped to 6.8 percent (and will be dropping below four percent in coming years). But your rate is still relatively low and the interest is typically tax-deductible. If the payment is affordable and the education you received boosted your income then your wife needs to accept the fact that the debt was an investment in your future.

Dear Liz: I'm trying to find a better interest rate for my savings. The rate I'm getting, 2.3 percent, is dismal. I respect your opinion and would appreciate the advice.

Answer: You can do a little better by signing up with one of the online banks such as ING Direct or EmigrantDirect. These banks offer FDIC-insured accounts that typically pay more than your local bank, although the rates they're offering now are around three percent – far below the five percent they touted before the Federal Reserve started trimming short-term rates.

Another option may be your local credit union. Credit unions are not-for-profit and member-owned, which often translates into slightly better rates.

You also could squeeze out a little more interest by locking your money into certificates of deposit with different maturities, known as "laddering" your CDs. The average rate for a one-year CD is currently about three percent, although you can find banks that are paying as much as 3.5 percent (Bankrate.com is one place to check for higher yields).

Beyond that, you typically have to take more risk to get more return.

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© 2008, No More Red Inc. Liz Pulliam Weston is author of the new book “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life.” She regrets that she cannot respond personally to inquiries, but questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., #238, Studio City, CA 91604, or use the “Contact Liz” form at her website, www.lizweston.com.

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