January 2017 : 2017 Federal Income Tax Rates & Brackets, Etc., Selected IRS Publications, and Attorney “Tax Deduction” Letters

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

In Rev. Proc. 2016-55 (IRB 2016-45), the IRS released the 2017 tax rates applicable to taxable income of taxpayers ling tax returns as single, married filing jointly, or head of household.

[TABLE INCLUDED IN PDF FILE]

Standard Deduction

  • Single … $6,350; $7,900 if 65 Years Old
  • Married Filing Jointly … $12,700; $13,950 if One Spouse is 65, $15,200 if Both Are 65
  • Head of Household … $9,350; $10,900 if 65

Personal Exemption

The personal exemption for 2017 is $4,050. However, 2% of the personal exemption is “phased out” – or reduced – for each $2,500, or part of $2,500, if a taxpayer’s adjusted gross income (AGI) exceeds the statutory threshold for subject filing status, as follows:

[TABLE INCLUDED IN PDF FILE]

Long-Term Capital Gain Rates

  • 0% for taxpayers in the 10% or 15% brackets.
  • 15% for:
    • Single Filers with taxable income between $37,950 and $416,700
    • Married Filing Jointly with taxable income between $75,900 and $470,700
    • Head of Household with taxable income between $50,800 and $444,550
  • 20% for taxpayers with taxable incomes exceeding the high end of the above ranges

Selected IRS Publications
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Continued in PDF file below… “2017 Federal Income Tax Rates & Brackets, Etc., Selected IRS Publications, and Attorney “Tax Deduction” Letters”
View / Download January 2017 Article – PDF File

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

December 2016 : Nontaxable/Nondeductible Designation of Payments

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

General

A question put to me recently was, essentially – Can payments that may qualify as taxable/deductible be stipulated as nontaxable/nondeductible with assurance they will be so treated for tax purposes?

The answer is “yes”, pursuant to IRC 71(b)(1)(B). Just as it is important to include a “tax intent” provision when payments are intended to be taxable/deductible, the same is advisable when they are intended to be nontaxable/nondeductible. Tax intent provisions prevent misunderstandings down the road. Sometimes a tax preparer may suggest payments are deductible by the payer when such was not intended. A tax intent provision prevents this.

The following is sample generic language for a nontaxable/nondeductible tax intent provision:

“Defendant’s payments of [property/spousal support] to Plaintiff provided in paragraph [ ] are hereby designated by the parties, pursuant to IRC Section 71(b)(1)(B), as not includable in Plaintiff’s income under IRC Section 71 and, correspondingly, not deductible by Defendant under IRC Section 215. Plaintiff and Defendant agree that neither will file an income tax return on which subject payments are reported inconsistently with their expressly designated nontaxable/nondeductible status.”

Other Uses

Lump-Sum Payable on Death of Payer — The nontaxable/ nondeductible designation can be used to ensure that payments of life insurance proceeds or a lump-sum settlement from the estate of a deceased spousal support payer, which is not deductible as alimony on an estate’s income tax return, will not be taxable to the payee. This prevents the possibility of one party being taxed on a sizable payment for which there is no corresponding deduction by the other’s successor-in-interest.

It is common after the death of an alimony payer to con- vert the balance of the obligation to its lump-sum, present
value, after-tax equivalent (using the payee’s tax rate) and pay it in full with insurance proceeds. The nontaxable designation accommodates this practice.

Lump-Sum Payable for Other Reasons
……

Continued in PDF file below… “Nontaxable/Nondeductible Designation of Payments”
View / Download December 2016 Article – PDF File

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

November 2016 : Federal Income Tax Filing Tips and Related Info

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

As the end of the year approaches, income tax ling questions frequently arise. The following are selected tax filing tips and related information.

Joint Income Tax Returns

It is widely known that if a couple is legally married as of December 31, they 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 a judgment into the succeeding year to take advantage of joint tax return filing one last time.

However, under current tax rules – including the pernicious alternative minimum tax – it is generally advisable to “run the numbers” assuming, alternatively, joint tax return filing and separate tax return filing, to determine which will result in the lower combined tax. If the latter would result in the lower tax, entering the judgment in the current year should be considered.

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 also relevant considerations:

Joint and Several Liability

If a joint return is filed, the 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 a joint tax return.

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 deciding to file jointly to achieve tax savings.

Joint Tax Refunds

Most divorce settlements provide for the division of a tax refund on the final joint return. The check will be sent to the address on the return and will be payable to both parties. Thus, 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 foreseeable, 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… “Federal Income Tax Filing Tips and Related Info”
View / Download November 2016 Article – PDF File

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

April 2015 : Four Federal Income Provisions Relating to Divorced or Legally Separated Parents Providing Child Support

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following presents basic information on four federal income provisions relating to divorced or legally separated parents providing child support for one (or more) dependent child. These provisions (1) often provide significant tax savings – particularly to parties of modest means – and (2) are often overlooked by divorce counsel who can provide a valuable service by advising clients to check to see if they qualify for any of such tax benefits.

Dependency Exemptions General Rule

IRC Section 152(e) provides that if the parents, on a combined basis, (1) provide more than half a child’s support for the year and (2) have physical custody for more than half the year, then the parent having physical custody for more than half the year (the custodial parent) is entitled to the exemption.

The custodial parent may “release” the exemption to the other parent by executing a written waiver for (1) one year, (2) a specific number of years, or (3) all future years. IRS Form 8332 is the waiver that the custodial parent must execute to release the exemption. e non-custodial parent must attach the executed Form 8332 to his/her tax return for the year(s) for which the exemption has been released.

Other Aspects of the Dependency Exemption

  • The above applies to parents living apart for the last six months of the year as well as to divorced or legally separated parents.
  • “Physical custody” for more than half the year is deter- mined based on overnights. If overnights are equal, the parent with the higher adjusted gross income is deemed the custodial parent.
  • The waiver can be used to, effectively, provide that the parents will claim the exemption in alternating years.
  • Support provided by a parent’s new spouse, or his/her parents, is deemed provided by the parent.
  • The custodial parent may revoke the waiver by executing Part III of Form 8332. Such a revocation applies to the succeeding tax year.
  • The federal income tax exemption amount is $4,000 for 2015.

Phase-Out of the Tax Benefit of Personal and Dependency Exemptions

The tax benefit of personal and dependency exemptions is phased out for high income taxpayers.

The adjusted gross income (AGI) amounts at which the phase-out applies are as follows for 2015:
(Table shown in PDF below)

A taxpayer’s deduction for personal and dependency exemptions is reduced by 2% for each $2,500, or fraction thereof, that his/her AGI exceeds the above threshold amounts.

Example: A single individual has a $300,000 AGI. In addition to his personal exemption, his ex-wife has released the dependency exemption to him for their minor child who lives with her. The phase-out works as follows:

  • Two exemption deductions unreduced – 2 x $4,000 = $8,000
  • Number of $2,500 amounts, or a fraction there- of, by which AGI exceeds threshold – $300,000 – $258,2500/$2,500 = 17
  • Percent reduction in exemption deduction – 2% x 17 = 34%
  • Reduced exemption deductions – 100% – 34% = 66% x $8,000 = $5,280

Practice Pointers
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Continued in PDF file below… “Four Federal Income Provisions Relating to Divorced or Legally Separated Parents Providing Child Support”
View / Download April 2015 Article – PDF File

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

February 2015 : 2015 Federal Income Tax Rates & Brackets, Etc., and Selected IRS Publications

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

2015 Federal Income Tax Rates & Brackets and Related Information

The following presents the 2015 tax rates applicable to taxable income of taxpayers filing tax returns as single, married filing jointly, or head of household.
(Table shown in below PDF file)

Standard Deduction

  • Single … $6,300
  • Married Filing Jointly … $12,600
  • Head of Household … $9,250

Personal Exemption

The personal exemption for 2015 is $4,000. However, 2% of the personal exemption is “phased out” – or reduced – for each $2,500 – or part of $2,500 – a taxpayer’s adjusted gross income (AGI) exceeds the statutory threshold for subject ling status, as follows:
(Table shown in below PDF file)

Selected IRS Publications
……

Continued in PDF file below… “2015 Federal Income Tax Rates & Brackets, Etc., and Selected IRS Publications”
View / Download February 2015 Article – PDF File

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