Posts by Joseph W. Cunningham, JD, CPA

Jan 2021 : 2021 Tax Rates – 2021 Federal Income Tax Rates & Brackets, Etc., and 2021 Michigan Income Tax Rate and Personal Exemption Deduction

Posted by Joseph W. Cunningham, JD, CPA

View / Download January 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Federal Income Tax

The following are inflation adjusted tax rates and standard deductions for 2021 as announced by the IRS (IR-2020-245).

Personal Exemption

There is no personal exemption. It was eliminated by the Tax Cuts & Jobs Act. of 2018.

2021 Long-Term Capital Gain Rates

  • 0% for taxpayers in the 10% or 12% brackets.
  • 15% for:
    • Single filers with taxable income between $40,400 and $445,850
    • Married Filing Jointly with taxable income between $80,800 and $501,600
    • Head of Household with taxable income between $54,100 and $473,750
  • 20% for taxpayers with taxable incomes exceeding the high end of the above ranges

Child Tax Credit

The Child Tax Credit is $2,000 for qualifying children.

A qualifying child is, in general, a child of the taxpayer who resides with the taxpayer for more than half of the year.

Michigan Income Tax

Tax Rate

The Michigan income tax rate remains unchanged at a 4.25% flat rate.

Personal Exemption

The number of personal exemptions a Michigan taxpayer could claim had previously been tied to the number claimed for federal tax purposes. With the elimination of federal tax personal exemptions, Michigan enacted Senate Bill 748 (Bill), signed by Governor Snyder on February 28, 2018.

Under the Bill, the reference to federal exemptions is removed. The Michigan personal exemption deduction for 2021 is $4,900.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “2021 Tax Rates 2021 Federal Income Tax Rates & Brackets, Etc., and 2021 Michigan Income Tax Rate and Personal Exemption Deduction”
View / Download January 2021 Article – PDF File

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

Read More “Jan 2021 : 2021 Tax Rates – 2021 Federal Income Tax Rates & Brackets, Etc., and 2021 Michigan Income Tax Rate and Personal Exemption Deduction”

Dec 2020 : Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)

Posted by Joseph W. Cunningham, JD, CPA

View / Download December 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts:

  • As part of their 2005 Settlement Agreement, H was obligated to pay W $1,000 principal & interest payments a month over 12 years on a $175,000 debt to her.
  • The obligation was to be secured by certain real property and, further, H was to sign a “mortgage note” – which he never did.
  • Interest on the obligation was provided as “accruing interest as a traditional mortgage note in the amount of 3.75%.”
  • After the final payment in 2017, W claimed that H owed her over $50,000 in accrued interest.
  • H claimed that a simple interest rate should apply resulting in accrued interest of $6,250.
  • W’s expert testified that “a traditional mortgage note meant a bank mortgage calculated under an amortized interest schedule” – which means interest compounded monthly.
  • H’s expert testified that, without a note, he could not determine the interest owing.
  • In short, the trial court applied laches and ruled that, because W did not seek to enforce the provision that H sign a note, H’s interest calculation should apply.
  • W appealed.

Court of Appeals Decision

  • In pertinent part, the Court ruled that the language in the Settlement Agreement providing for “interest as a traditional
    mortgage note in the amount of 3.75%” was not ambiguous and, accordingly, that the trial court erred by adopting H’s calculated simple interest.
  • It also held that the trial court could not sua sponte raise the defense of laches. H had not claimed laches as a defense but rather that W’s calculation was incorrect.
  • The case was remanded so that the accrued interest owing would be calculated as it would be under a traditional mortgage note.

A Better to Way to Provide for Interest on a Divorce-Related Installment Obligation

  • The IRS has ruled that interest on an obligation between divorced spouses is “personal interest” and, hence, not deductible by the payor.
  • But, it is nonetheless taxable to the payee.
  • To avoid this tax whipsaw, the interest rate can be converted to its lower, after-tax equivalent and “baked in” to the payments.
  • For example, 2.5% is the approximate after-tax equivalent of a 3.5% pre-tax rate for an individual in a 25 percent tax bracket.
  • The first step is to calculate the payment by running an amortization schedule using the after-tax rate – 2.5% in the above example. Then provide in the divorce document for the payor to make the payments with no stated interest.
  • The use of an unstated after-tax rate avoids having the payee pay tax on interest the payor cannot deduct.
  • This is a viable approach since the IRS has stated that the imputed interest rules do not apply to divorce settlement obligations. Tech Adv Mem 200624065 (Dec 6, 2005); Priv Ltr Rul 8645082 (Aug 14, 1986).
  • Prepayment can be accommodated by providing for a discount equal to the after-tax rate applied to the remaining payments over the period they are scheduled to be paid. Here is a sample clause:

    “Plaintiff is entitled to prepay this obligation, either in full or in part, by making payments in excess of the required payments. If Plaintiff does prepay the obligation, in full or in part, [he / she] is entitled to a discount on the remaining balance of the installment payments equal to 2.5 percent of the amount prepaid for each year (prorated for a partial year) between when the prepayment is made and when such amount would otherwise be due pursuant to the terms provided above.”

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)”
View / Download December 2020 Article – PDF File

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

Read More “Dec 2020 : Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)”

Nov 2020 : Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)

Posted by Joseph W. Cunningham, JD, CPA

View / Download November 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • After a 35-year marriage, H and W agreed to a settlement which provided, inter alia, that (1) H was awarded his pension – “free and clear of any claim” of W – and (2) W received the marital residence which had an equity of around $100,000.
    • However, they asked the trial court to determine spousal support. The judge awarded W, who had some health issues, permanent spousal support of $2,000 a month.
    • The judge notified the parties that H could ask for spousal support to be modified when he retired.
    • When H did retire, he took an approximately $440,000 lump sum pay-out for his pension which is what he had to live on for the rest of his life.
    • H petitioned the court to terminate spousal support since his only source of income was his pension which he received as his property in the settlement.
    • The trial court, after reviewing the circumstances of each party – including the disparity between $440,000 pension and the $100,000 home equity – reduced spousal support to $961.50, calculated by taking the approximate $300,000 difference and dividing it by W’s life expectancy.
    • H appealed.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision to reduce, but not terminate, spousal support.
  • But, the Court ruled that the trial court failed to consider several relevant factors including:
    • The taxes H had to pay on receipt of the lump-sum;
    • That contributions were likely made to H’s retirement after the divorce and, hence, were not marital; and,
    • That the lump-sum was all H had to live on for the rest of his life.
  • The Court noted that the parties agreed that H would have the pension as his property and, further, that once an asset is awarded, it “is not subject to invasion by the former spouse, even indirectly, which is precisely what occurred when the trial court … considered the pension” as H’s income for determining spousal support.
  • However, the Court also noted that a previously awarded pension is a consideration in balancing the “incomes and needs of the parties in a way that will not impoverish either party.”
  • Thus, the Court remanded the case so that the trial court takes these factors into account.

Comments on the Case

  • The Court’s ruling is essentially as follows:
    • Income from a retirement bene/t awarded as property in a divorce settlement may not be included as income in a subsequent modification of spousal support.
    • But, such income is properly a consideration when doing so because the principles governing modification of spousal support are that “support must be just and reasonable under the circumstances and should balance the incomes and needs of the parties” so as not to impoverish either.
    • The tension between these two principles presents a tightrope to tread in attempting to achieve an equitable result in the “case specific” nature of divorce.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)”
View / Download November 2020 Article – PDF File

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

Read More “Nov 2020 : Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)”

Oct 2020 : Court of Appeals Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download October 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W agreed to a divorce settlement at mediation which was then recorded and later incorporated into a Judgment of Divorce (JOD) entered in 2015.
  • H owned 102,857 shares of restricted stock which the JOD awarded to him except that –

    if the restricted stock were redeemed pursuant to a specific Company agreement – then W would receive 50% of the portion attributable to the years of marriage during which H owned the stock.

  • In pertinent part, the JOD provision stated that the marital portion of potential redemption proceeds would be:

    “proportional to the number of years Plaintiff owned said stock while the parties were married and the total number of years Plaintiff owned said stock prior to the date of redemption.”

  • The restricted stock was redeemed about a year after the divorce.
  • H applied the coverture fraction in determining the marital portion of which W was to receive 50%.
  • W filed a motion claiming that, according to the JOD, she was entitled to 50% of the total redemption proceeds.
  • The trial court, after (1) conducting a hearing on the issue, (2) reading briefs of both parties, and (3) reviewing a relevant portion of the transcript of the settlement recording, decided that (1) the JOD provision regarding the restricted stock was ambiguous and (2) W was entitled to 50% of the total redemption proceeds.

H appealed.

Court of Appeals Decision

  • The Court of Appeals (Court) found that the JOD provision regarding the restricted stock was not ambiguous but rather clearly set forth a formula for determining the portion of eventual redemption proceeds to be deemed marital.
  • The Court noted that the latter half of the JOD provision designates that W’s share of the proceeds to be “proportional” and would need to be ignored by the trial court to award W 50% of the total redemption proceeds.

Comments on the Case

  • Use an Example – For provisions regarding the future divisions of various forms of executive compensation, it is often advisable to include an example using hypothetical amounts. This significantly reduces the chance of differing interpretations down the road.
  • Provide for Tax Consequences – It is noteworthy that the JOD restricted stock provision in Blight was silent on tax consequences. Restricted stock is generally taxable on the expiration of the last of restrictions to which the stock is subject. It is advisable to provide for tax consequences when dividing various forms of compensation in a divorce settlement.
  • Skelly Does Not Prevent Parties’ Agreement – In the Court of Appeals published Skelly v. Skelly decision (286 Mich. App. 578 (2009)), the Court ruled that an executive benefit awarded during marriage but subject to a vesting event occurring after divorce was not marital property.

It has previously been expressed in this column that:

  • The Court’s decision in Skelly is over broad and arbitrary, and could result in inequitable divisions of property in fact attributable to years of the marriage.
  • However, parties, in reaching a divorce settlement, are free to disregard Skelly in reaching an equitable division of property. Whether done knowingly or not, that is what the Blights did in dividing H’s restricted stock which they knew would not vest until after the divorce.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Court of Appeals Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)”
View / Download October 2020 Article – PDF File

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

Read More “Oct 2020 : Court of Appeals Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)”

Aug / Sept 2020 : Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download Aug-Sept 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W, who married in 2007, were both attorneys and maintained separate legal practices.
  • They also maintained separate bank accounts during their marriage.
  • In 2016, they purchased the marital home for $375,000. W paid the purchase price with funds from her account.
  • However, H arranged for $100,000 to be transferred to W’s account in connection with the purchase.
  • Both parties’ names were on the deed.
  • In addition to his law practice, H spent 15 hours or so a week working at his father’s business without getting paid. However, his father provided H with rent-free space.
  • W claimed that, citing Hanaway,1 some value of the father’s business should be imputed to H in the division of the marital estate.
  • The trial court treated the marital home as a marital asset and rejected W’s claim about the father’s business.
  • W appealed.

Court of Appeals Decision

  • The Court affirmed the trial court’s division of property.
  • In so ruling, the Court noted that the money in W’s account used to purchase the home consisted of her earnings during the marriage.
  • In this regard, the Court stated “that funds earned during a marriage are to be considered marital property.”
  • And, further, that “regardless of the parties’ intentions with their separate bank accounts, they agreed to jointly purchase the home by combining their separate funds and to hold the home in both of their names.”
  • On the other issue, the Court ruled that, unlike in Hanaway, H did not own a legal interest in his father’s business.
  • The Court also noted that H had testified that when his father died, his estate would pass to H’s mother and, further, that one of his brothers had special needs and that another had loaned money to the father over the years.
  • The Court said the trial court did not err in refusing to impute value to H of an asset in which he had no legal interest.

Comments on the Case

  • As the Court stated, money earned during marriage is marital regardless how disproportionately between the parties or whether it is deposited in a separate bank account.
  • However, a written separation agreement may provide that, as of a specified date, future earnings are no longer marital.
  • Regarding the other issue, there are cases involving family businesses owned by a parent but are essentially run by one of the parties who will clearly inherit the business.
  • If this has occurred during much of a long-term marriage, equity often screams that the business should be taken into account in a divorce settlement.
  • Should the mere fact that a party does not currently own a legal interest in a business of which he/she is CEO and certainly in line for future ownership be the overriding factor in fashioning an equitable divorce settlement in a long-term marriage?
  • That is the current state of the law which clearly frowns on any degree of speculation on what might happen going forward, despite how probable and significant it may be.
  • Of course, in “amicable” divorce settlements, provisions can be made to assure equitable results in such cases.

Endnote

1 Hanaway v Hanaway, 208 Mich App 278; 527 NW2d 792 (1995).

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)”
View / Download Aug-Sept 2020 Article – PDF File

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

Read More “Aug / Sept 2020 : Property Settlement – Court of Appeals Upholds Trial Court’s Property Settlement Decision. Gappy v Gappy, Mich App No. 342861 (9/19/19) (Unpublished)”