Aug / Sept 2016 : Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Consider the following example:

  1. Parties – A and B – were married on 7/1/96 and divorced 20 years later on 6/30/16
  2. B has been a participant in her employer’s 401(k) plan since before marriage. At marriage, the account balance was $30,000.
  3. B had no plan loan balance at time of marriage, but she drew a $50,000 loan from the plan during marriage to provide funds for a family vacation home in northern Michigan.
  4. At divorce, the 401(k) account consisted of $100,000 in investments and a remaining loan balance of $20,000.
  5. Since the loan funds were used for marital purposes, the unpaid plan loan is a marital debt.
  6. Based on these facts, A and B will divide the $70,000 net increase in the account during marriage. A’s $35,000 will be paid from non-loan plan assets.
  7. B will also receive $35,000 of non-loan assets as well as the $20,000 plan loan receivable for which she is responsible to repay (essentially, to herself).
  8. The following presents the division of the account value, including the plan loan receivable.

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Continued in PDF file below… “Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?”
View / Download August/Sept 2016 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section