Recent Articles

February 2017: Dependency Exemptions for Divorced or Separated Parents

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

At this time of year, questions often arise as to which of two parents—recently divorced or presently separated—is entitled to the dependency exemption for a child of the marriage.

General Rule under IRC Section 152(e)

IRC Section 152(e) provides a special rule for the right to claim an exemption of a child of divorced or separated parents who, for the year in question:

  • Are divorced or separated under a decree of divorce or separate maintenance at year end; or,
  • Are separated under a written separation agreement at year end; or,
  • Have lived apart at all times during the last six months of the year.
  • And, on a combined basis, had custody of the child for more than half the year; and,
  • On a combined basis, provided more than half the child’s support for the year (support received from a new spouse of a remarried parent is considered provided by that parent).

If these conditions are satisfied, the custodial parent (defined as the parent having physical custody for more than half the year) is automatically entitled to the exemption for a child regardless of:

  • of what the decree or agreement provides
  • which parent furnished more than half of the child’s support.

Waiver Exception to General Rule

For any specified year, or years, or for all future years, the custodial parent may release his or her right to claim the exemption for a child to the noncustodial parent.
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Continued in PDF file below… “Dependency Exemptions for Divorced or Separated Parents”
View / Download February 2017 Article – PDF File

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

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
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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

October 2016 : Revisiting Holder’s Interest Value – or Value to the Owner

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Of late, the holder’s interest standard – or measure – of value for appraising professional and commercial enterprises for divorce has been subject to criticism. The following addresses issues raised.

Background

Holder’s Interest Value—“Holder’s interest” value – also referred to as investment value to the owner – of a business appraised for divorce settlement purposes is essentially the value to the current owner based on financial benefits consistently received from the business, unless there is reason to believe the business will soon be sold or discontinued.

The underpinning is that financial benefits provided by the company are often the product of contributions by both spouses during marriage such that both should share in that value in a divorce settlement.

If that value is not transferable in a sale – such as a surgeon’s referral sources or a widget maker’s personal relation- ship with a valuable customer – it will only be reflected in the business value if it is assumed the current owner will continue the enterprise after the divorce.

Fair Market Value—Holder’s interest value is distinguished from the most commonly known standard/measure of value – fair market value (FMV) – defined as the price at which a business would sell between a willing buyer and a willing seller, both well informed and acting at arm’s length, and neither acting under duress.

The principal difference is that holder’s interest value is premised on the current owner retaining the business post- divorce, whereas FMV is premised on a hypothetical sale to a third party.

In determining FMV of a non-marketable closely-held business, a lack of marketability discount, typically in the 25%-35% range, is deducted from the calculated value – that is, between 1/4 and 1/3 of the total value is eliminated based on the assumption of a hypothetical sale. Aside from this significant discount, valuable but non-transferable attributes of the enterprise – such as noted above – will not be captured in the hypothetical sale value.

Premise of Holder’s Interest Value—Jay Fishman, a nationally renowned business valuation expert, at an American Academy of Matrimonial Lawyers 2006 seminar, presented the following quote from the California appellate court in its landmark Golden v. Golden opinion in support of value to the owner:

“… in a matrimonial matter, the practice of the sole practitioner husband will continue, with the same intangible value as it had during the marriage. Under the principles of community property law, the wife by virtue of her position of wife, made to that value the same contribution as does a wife to any of the husband’s earnings and accumulations during marriage. She is as much entitled to be recompensed for that contribution as if it were represented by the increased value of stock in a family business.”

In this regard, there is no substantive difference between community property law and Michigan’s equitable distribution statute concerning contribution of the non-business owner spouse.

Michigan Court of Appeals Holder’s Interest Decisions

—As summarized at the end of this article, the Michigan Court of Appeals has consistently approved use of holder’s interest value where there is no indication that the owner will not continue to operate the enterprise post-divorce.
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Continued in PDF file below… “Revisiting Holder’s Interest Value – or Value to the Owner”
View / Download October 2016 Article – PDF File

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