DEBT MANAGEMENT » Get out of Debt

The Treasury Department recently reported that the United States debt is dangerously close to reaching its self-imposed limit of $12.1 trillion dollars. Currently, we are only $211 billion shy of reaching the ceiling with an increase rate of nearly $3.8 billion per day. What is the Treasury going to do?

The Debt Ceiling Will Likely be Raised

Most likely, the way that lawmakers will resolve the issue is by simply raising the debt ceiling. According to recent Standard & Poor's data, this has already been accomplished 76 times since 1960 and will likely be done again before the debt reaches its self-imposed ceiling, possibly in Nov. 2009.

What Happens If the Ceiling Isn't Raised?

If lawmakers don't raise the ceiling before it is penetrated, the government will be forced to shut down. While this has occurred in the past without devastating results, there are still potential downfalls. One is that the value of the U.S. dollar will likely plummet, which could affect portfolios worldwide. Also, the Treasury might have to pull off some impressive tricks to come up with money. A few options include:

• Government securities: There is $113 billion available in government securities that are held in a 401k-type plan for federal employees (funds would need to be repaid with interest).
• Government dollar holdings: The Treasury can sell $16 billion in government dollar holds that are held in a currency stabilization fund.
• Fannie Mae and Freddie Mac debt: The Treasury also has the option to sell $165 billion worth of debt from these organizations.

What This Means for You

As already mentioned, not raising the debt ceiling can weaken the dollar. However, raising the ceiling sends the United States further into debt, which can result in higher taxes, reduced benefits and federal aid programs, as well as higher interest rates on home loans and more.

At this point, are hands are tied either way. So for now, all we can do is wait out the storm, hope the economy gets better, and find ways to save money while preparing for an uncertain future.

How do you feel about the nation's growing debt?

Whether you give or receive child support, you may be wondering what the tax consequences of your child support payments are. If you receive child support payments, do they count as taxable income? If you are making child support payments, can you write those off of your taxes? The answer to both questions is no.

Child support payments are not taxable. The parent making the child support payment cannot deduct it from their income, and the parent receiving the payment is not required to declare the payment as income. However, alimony payments - those made in support of a spouse, rather than a child are tax-deductible, and are considered taxable as income to the receiving party. If it is important to you to be able to declare the payments made in a divorce settlement, you should consult your divorce attorney and see if you and your spouse can negotiate higher "alimony" payments in lieu of child support. Child support payments are designated as such and are not taxable or tax deductible.

But what about claiming the child tax exemption? If you are providing most of the child's expenses, even if you don't live with the child, shouldn't you be able to claim the child as your dependent for tax purposes? The answer to that question is: not necessarily. In most cases, the "custodial parent" - the one who spends the most time with the child is the one entitled to the tax credit, even if that parent does not provide more than half of the child's financial support. While it is possible for the non-custodial parent to claim the child tax exemption, some fairly stringent conditions apply and there must be a written agreement, signed by the custodial parent, stating that he or she will not claim the child as a dependent on his or her own taxes. Both parents must also sign a 8332 form from the IRS, and that form must be attached to the non-custodial parent's tax return.

Unfortunately, the IRS also does not allow parents to split the tax exemption, although they may agree to negotiate the tax exemption on a yearly basis (one spouse claiming one year, the other claiming the next, etc). Whatever you and your spouse decide, it's important to make arrangements before the final decree of divorce to ensure that all standards have been met.

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