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