April 2017 : Estimated Tax Payments; Tax Refunds / Overpayments

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Estimated tax payments made–and/or taxes withheld – during the year of divorce may be a marital asset. Tax refunds, or overpayments applied to next year’s tax, attributable to tax payments made during marriage may also be a marital asset.

Or it may cut the other way–that is estimated tax payments and/or taxes withheld may be less than the actual tax on marital income received and shared during the year of divorce.

In this regard, note the following:

  1. Separate Returns for Year of Divorce – Whether divorcing parties can file a joint return or must file separate returns depends on their marital status as of December 31. If divorced as of that date, they must file separate returns for their respective separate incomes and deductions.
  2. Estimated Payments are Automatically Credited to the Husband – Since the husband’s social security number (SSN) is generally listed first on joint estimated payment vouchers (Form 1040ES) made during marriage, such payments will automatically be credited to him unless there is a written alternative provision agreed on by the parties.
     
    – The same applies to tax overpayments on the parties’ last joint return applied to the following year’s tax.
  3. Estimated Tax Payments and Taxes Withheld during Marriage are Marital Funds – Absent unusual circumstances, estimated tax payments and taxes withheld during marriage are made with marital money – essentially half by each party.

The above matters are often not addressed in divorce settlements. The following presents (1) observations on such tax payments and (2) applicable tax law.

Tax Payments Made during the Year of Divorce

Example – Assume the following alternative facts for joint estimated tax payments made by – and/or withheld on behalf of – H during the year of a divorce for which the judgment is entered on December 30.

[… Table with Example Data (see PDF below) …]

So, in Case #1, H will receive a windfall unless W’s attorney identifies the overpayment and makes an offsetting adjustment. Half of H’s $10,000 overpayment was made with W’s share of marital funds.
In Case #3, it is H’s attorney who needs to (1) identify that H will pay $10,000 of his own funds on income equally shared with W and (2) make an o setting adjustment. When paying the $10,000, H will, in effect, be paying both his and W’s $5,000 shares of the tax on marital income.

Agreement to Apportion Joint Estimated Tax Payments

IRS Publication 504 – “Divorced or Separated Individuals” – provides that divorced parties may agree on the division of joint estimated tax payments made during marriage.
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Continued in PDF file below… “Estimated Tax Payments; Tax Refunds / Overpayments”
View / Download April 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

November 2014 : Estimated Tax Payments Part II: Requirements for Spousal Support Recipients to Make Payments–Trap for the Unwary

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Last month’s column covered the need for divorce attorneys to appropriately “capture” as a marital asset estimated taxes paid or withheld in excess of the actual tax liability for the final year of the marriage, or part of a year, as the case may be.

There is also a need for spousal support recipients to be aware of requirements to make federal and state estimated tax payments on alimony income. Unlike with wages and salaries, tax is not withheld on spousal support payments. And, it is not uncommon for newly divorced spousal support recipients to be unaware of the obligation to make estimated tax payments on alimony income.

For federal, state, and, where applicable, city income tax purposes, estimated tax payments are due by April 15, June 15, September 15, and January 15 of the succeeding year. Forms 1040ES and MI 1040ES are used for this purpose for federal and Michigan estimates.

A consequence of not making required estimated tax payments is an underpayment penalty. In addition, of course, it may also result in an unexpectedly large tax liability when April 15 rolls around.
Two exceptions to the imposition of the underpayment penalty are:

  1. The total of tax withheld and timely made estimated tax payments exceeds 90% of the current year’s tax liability.
  2. The total of tax withheld and timely made estimated tax payments exceeds 100% of the prior year’s tax liability.

Example 1 – 90% of Current Year Tax Exception

  • W has annual W-2 earnings of $30,000 and receives spousal support of $4,000 a month.
  • Withholdings of $3,500 more than cover the tax on her $30,000 W-2 income (after reducing same by the standard deduction and exemptions). But, her federal income tax on the $48,000 of alimony income is $10,000 (all taxed at a higher bracket).
  • W should make federal estimated tax payments of $2,500 quarterly to avoid being subject to the underpayment penalty. She should do the same with respect to her state tax on the alimony income, and her city income tax, if applicable.
  • If she does, her $13,500 combined federal tax withheld and timely made estimated tax payments will exceed 90% of her current year tax liability.

Example 2 – 100% of Prior Year Tax Exception in First Year After Divorce
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Continued in PDF file below… “Estimated Tax Payments Part II: Requirements for Spousal Support Recipients to Make Payments–Trap for the Unwary”
View / Download November 2014 Article – PDF File

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

October 2014 : Estimated Tax Payments and Taxes Withheld During Pendency of Divorce Proceedings

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

It is generally accepted that income earned during marriage–including, absent an agreement to the contrary, income earned during the pendency of divorce proceedings–is marital.

Thus, quarterly estimated income tax payments made and income taxes withheld on salary/wages during marriage consist of marital funds applied to current year federal and state income tax obligations.

This aspect of divorce often receives scant attention from family law attorneys. Particularly when one party is in a position to “manipulate” estimated tax payments and/or taxes withheld, counsel for the other party should not overlook the possibility his/her client could be meaningfully short-changed.

Example 1

H owns a company (ABC) that operates as an LLC. Thus, ABC’s income “passes through” and, accordingly, is taxable to H on his personal income tax return. Thus, H makes quarterly estimated income tax payments to cover the taxes on the ABC pass-through income. Though both his and W’s names and SSNs are on the estimated tax forms he files, the tax payments will be credited to his SSN.

They have reached a divorce settlement and entered a judgment on September 30, 2014. ABC’s income and corresponding estimated income tax payments are as follows:

  • H’s ABC pass-through income for 2014 is projected at $120,000.
  • His federal and state income tax on the $120,000 is projected at $36,000.
  • H, with the divorce in mind, made estimated tax payments of $15,000 in each of April, June, and September 2014 – a total of $45,000.

Here’s how this plays out:
(Table shown in PDF file below)

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Continued in PDF file below… “Estimated Tax Payments and Taxes Withheld During Pendency of Divorce Proceedings”
View / Download October 2014 Article – PDF File

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

March 2014 : Lesser Known Federal Income Tax Filing Tips and Related Info

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

This is the time of year when income tax filing questions arise. The following presents selected tax filing tips and related information somewhat off the beaten path.

Joint Income Tax Returns

It is widely known that if a couple is legally married as of December 31, the couple may file a joint tax return for the year. This is often beneficial if one spouse has substantially more income than the other – usually resulting in the higher level income taxable in a lower tax bracket. In such situations, it is not uncommon for divorces concluding late in a calendar to defer entry of judgment into the succeeding year to take advantage of joint tax return filing one last time.

Whenever a joint return may be filed for a year and it is certain the parties will be divorced in the following year, the following matters may be relevant.

Joint and Several Liability

Parties will be jointly and severally liable for unpaid taxes and/or deficiencies later arising from an IRS tax examination. So, if it is suspected that one spouse is underreporting income and/or claiming excessive deductions, it is generally advisable that the other spouse not agree to file jointly.

While Innocent Spouse Relief protects some unwary joint filers from liability, such protection may not be available if a spouse had reason to believe that income is understated or deductions are padded.

Take Away – Consider potential liability before agreeing to le jointly to achieve tax savings.

Joint Tax Refunds

Most divorce settlements provide for the division of a tax refund on the final joint return. e check will be sent to the address on the return and will be payable to both parties. us, delay in receipt of a refund may result if the principal residence is used on the return and the refund is sent after the house is sold and the effective “forwarding address” period has expired. If this is forseeable, use another address on the return (e.g., in care of the CPA/tax preparer).

Take Away – Consider any potential logistical problems concerning receipt of a joint tax refund and make appropriate arrangements.

Joint Tax Overpayments Applied to Estimated Tax
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Continued in PDF file below… “Lesser Known Federal Income Tax Filing Tips and Related Info”
View / Download March 2014 Article – PDF File

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