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