April 2019 : IRC Section 529 Plans Expanded to Include K through 12 Public, Private, and Religious School Tuition

View / Download April 2019 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


Section 529 Plans – Prior to 2017 Tax Cuts and Jobs Act Changes (Tax Reform Act)

Internal Revenue Code Section 529 allows states to establish a tax-advantaged savings program that permits a person to contribute to an account for a designated beneficiary’s qualified higher education expenses (QHEE).

Distributions from such accounts – including earnings – are not taxable provided such distributions do not exceed the
beneficiary’s QHEE.

QHEEs include tuition, fees, books, supplies, and equipment – including technology equipment – required for attendance at a qualified institution of higher education (as defined in the 1998 Amendment to the Higher Education Act of 1965 – generally, any public college or university).

Distributions for QHEE are limited to $10,000 per beneficiary annually. If there is more than one Section 529 account for a beneficiary – e.g., one maintained by each set of grandparents – the $10,000 limit applies to distributions from all accounts on a combined basis.

Funds in a Section 529 account can be rolled into another Section 529 account for another beneficiary. So, if an account’s
funds exceed a beneficiary’s QHEE at time of graduation, the excess funds can be transferred to another beneficiary.

Grandparents, as well as parents, often use Section 529 plans to fund future educational expenses of loved ones.

Tax Reform Act Changes to Section 529 Plans

Under the Tax Reform Act, effective in 2018, tuition – and only tuition – for kindergarten through high school qualifies for the tax benefits under Section 529.

Further, this expansion applies to public, private, and religious school tuition for K through 12.

The definition of qualified expenses remains broader for post-secondary education.

Michigan Education Savings Program

Michigan has established the Michigan Education Savings Program (MESP) – a Section 529 program. Some features of the MESP:

  1. Investment Options – The MESP offers many investment options for differently aged beneficiaries. The investment risk level options include Aggressive, Moderate, and Conservative.
  2. Tax Benefits – A person filing as single can deduct up to $5,000 in MESP contributions annually for Michigan income tax purposes. The limit is $10,000 for a couple filing a joint Michigan income tax return.
  3. So, at Michigan’s 4.25% tax rate, every $1,000 of contributions saves $42.50 in Michigan taxes.
  4. Of course, the primary tax saving is the exclusion from federal income tax of the earnings in the account.
  5. Fees – There are no enrollment or account maintenance fees. There is a modest program management fee and a fee on underlying investments.
  6. Not Restricted to Michigan Educational Institutions – Distributions for QHEE can be for an educational institution
    outside Michigan

Relevance to Divorce

Provision for educational expenses – particularly K-12 private school and post-secondary education – is often an objective in divorce settlements. Use of Section 529 may offer a tax-advantaged way of doing so – particularly now for K-12 private school tuition.


Private or Religious Grade & High School Example:

  • Dad agrees to pay a child’s private school tuition of $10,000 annually.
  • Using a 529 plan to do so saves $425 of Michigan tax each year.
  • And, any earnings in the account are tax free if all used for qualified education expenses.

For public college and university expenses, it is advantageous to start when children are young and, hence, the savings horizon is long enough to establish significant funds for education.

College Example:

  • Contributing $250 a month for a 5 year-old child, invested at 2%, will result in over $44,000 at the child’s age 18.
  • The $8,000 earnings will be free of federal and state income tax if used for qualified education expenses.
  • And, the Michigan tax savings total $1,530 over the 13 years.

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… “IRC Section 529 Plans Expanded to Include K through 12 Public, Private, and Religious School Tuition”
View / Download April 2019 Article – PDF File

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

March 2019 : Tribute to Norm Robbins

View / Download March 2019 Tribute – PDF File

Tribute to Norm Robbins

Norm Robbins died in late January at age 99. He was a pioneering luminary in Michigan family law.

Norm and a handful of other prestigious family law attorneys founded the Family Law Section of the State Bar in the 1970s. I believe Norm served as the first chairperson of the Section and was instrumental in its successful launch. From that initial small core of attorneys, the Section grew to 3,000 and became active on many fronts.

Norm was also the first to be honored with the Section’s Lifetime Achievement Award—a recognition of his many high-level contributions to the practice of family law in Michigan.

To wit, he was largely responsible for establishing the Michigan Family Law Journal as one of the state’s best section periodicals. Norm was the initial editor of the MFLJ and served in that capacity for over forty years. Doing so was a labor of love for Norm. He was extremely dedicated to maintaining and improving its high quality.

Norm maintained two columns for many years – his insightful “Commentary” and his delightful “Quid Pro Quo” – “Did You Know” column.

In 1981, Norm asked me to begin my Tax Trends and Developments column. As the first regular MFLJ columnist other than Norm, I was deeply honored.

This also gave me an opportunity to deepen my friendship with Norm, which I have cherished these many years.
Norm was more than an exceptional, pioneering family law attorney. He was kind and considerate. He brought civility and moderation to fractious situations. He was an “old school” lawyer in the best sense of the term.

Norm was a gentleman and a gentle man. He was exem-plary of the many virtues of the Greatest Generation to which he belonged

While Norm will be dearly missed, his prodigious legacy – as one of the founders of the Family Law Section and longtime editor of the highly regarded Michigan Family Law Journal – will survive him well into the future.

All of us in the Michigan family law arena are better off because of Norm. It was an honor to know him.

Download the PDF file below… “Tribute to Norm Robbins”
View / Download March 2019 Tribute – PDF File

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

February 2019 : Tips on Providing for Joint Tax Refunds, Overpayments, and Estimated Taxes in a Divorce Context

View / Download February 2019 Article – PDF File

With the tax return filing season getting into high gear, the following are tax matters often overlooked in divorce settlements. Where applicable, simply providing a copy of this article to a client with the recommendation to consult with a tax advisor is a potentially valuable service.

Joint Tax Refunds

Address on Tax Return— 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 marital home 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).

Notification and Documentation— It is advisable to provide that the party who receives the refund check must notify the other party, provide documentation of the refund, and make payment of the other party’s share within a specified time frame – e.g., one week.

Take Away— Consider potential logistical problems concerning receipt and division of a joint tax refund and make appropriate arrangements, and provide for notification, documentation, and payment.

Joint Tax Overpayments Applied to Estimated Tax

Advantage of Applying an Overpayment— Many taxpayers apply for extensions rather than filing by April 15. And most with income not subject to withholding – LLC income; S Corporation income; investment income – must make estimated tax payments due April 15, June 15, September 15, and January 15 each year.

An overpayment from a prior year is deemed received by the IRS as of the April 15 initial due date even if the return is filed six months later at or near the October 15 extended due date. Thus, it is often advantageous to apply an overpayment to the succeeding year tax liability, especially if a taxpayer realizes late in the year when the return is filed that preceding estimated payments are insufficient to avoid the underpayment tax liability. This can be done with the entire overpayment, or just part of it with the balance refunded.

Parties Can Each Apply Part of Overpayment— Parties are free to agree on the application of an overpayment on a joint return to the next year’s tax. If the amount so applied is allocated 100% to the husband, nothing needs to be done on either spouse’s succeeding year tax return. However, if the overpayment is to be divided equally, husband will need to make an after-tax payment to wife to square things off.

If any of the overpayment is to be applied to wife’s tax, she must enter husband’s SSN in the appropriate space on page one of her Form 1040 followed by “DIV”. If wife has remarried, she must enter ex- husband’s SSN at the bottom of Form
1040 page one, again followed by “DIV”.

Take Away— If either party relies on estimated tax payments and an overpayment is possible, make provisions in advance for potential advantageous use of the overpayment.

Estimated Taxes

New Requirement for Many— Many recipients of taxable spousal support provided in pre-2019 divorce settlements have never needed to make quarterly estimated tax payments. However, since no income tax is withheld on spousal support payments, estimated tax payments are generally necessary to avoid (1) a large April 15 payment and (2) corresponding underpayment of tax penalties. This applies to both federal and state income taxes.

The underpayment penalty may be avoided if the amount paid in – via wage withholding or estimated tax payments – exceeds the party’s hypothetical prior year tax based solely on his or her individual income and deductions. This often applies in the first year of receipt of spousal support, but not generally to subsequent years.

Take Away— Attorneys should advise clients awarded taxable spousal support to contact his or her tax advisor regarding estimated tax payment requirements.


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… “Tips on Providing for Joint Tax Refunds, Overpayments, and Estimated Taxes in a Divorce Context”
View / Download February 2019 Article – PDF File

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

January 2019 : 2019 Federal Income Tax Rates & Brackets, Etc., and 2019 Michigan Income Tax Rate and Personal Exemption Deduction

View / Download January 2019 Article – PDF File

Federal Income Tax

In the Tax Cuts and Jobs Act, passed in December 2017, federal tax rates were reduced and the tax brackets were expanded effective for tax year 2018. Also, the standard deduction was almost doubled while the deduction for personal exemptions was eliminated, as were some itemized deductions.

The following are inflation adjusted tax rates and the standard deduction for 2019 as announced by the IRS:

2019 Federal Income Tax Rates & Brackets and Related Information

2019 Federal Income Tax Rates & Brackets and Related Information

Standard Deduction

  • Single $12,200; $13,850 if 65 Years Old
  • Married Filing Jointly $24,400; $25,700 if one spouse is 65, $27,000 if both are
  • Head of Household $ 18,350; $20,000 if 65

Personal Exemption

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

Estimated 2019 Long-Term Capital Gain Rates

  • 0% for taxpayers in the 10% or 12% brackets.
  • 15% for:
    • Single filers with taxable income between $39,475 and $519,300
    • Married Filing Jointly with taxable income between $78,951 and $612,350
    • Head of Household with taxable income between $52,850 and $510,300
  • 20% for taxpayers with taxable incomes exceeding the high end of the above ranges

2018 Tax Forms – 2018 federal income tax forms are accessible at www.irs.gov


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 and the Michigan personal exemption deduction is increased from the $4,000 2017 allowance as follows:

  • 2018 – $4,050
  • 2019 – $4,400
  • 2020 – $4,750
  • 2021 – $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… “2019 Federal Income Tax Rates & Brackets, Etc., and 2019 Michigan Income Tax Rate and Personal Exemption Deduction”
View / Download January 2019 Article – PDF File

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

December 2018 : Strategy for Allocating the Property Tax Deduction in Year of Divorce to Minimize Effect of New Limits on Deducting Taxes

View / Download December 2018 Article – PDF File

The 2017 Tax Cuts and Jobs Act limits the annual itemized deduction for state and local taxes to $10,000. Such taxes include (1) state and local income tax, sales tax, and property tax.

The $10,000 cap does not apply to taxes on land used for farming or a rental property. It does, however, apply to second homes – e.g. a cabin up north – and to investment property.

In the year of divorce, for which each party will file a separate tax return, it is common for real property taxes to have been paid from a joint account before date of divorce. Under federal tax law, payments made from a joint account in which both spouses have an equal interest are presumed made equally by them.

That presumption can be rebutted by evidence that funding of the account was other than equal.

Example

  • Assume that H, the higher earning spouse, contributed 80% to the account and W 20%. The property tax deduction is allocated accordingly.
  • But as the higher earner, H will have higher state (and possibly local) income taxes.
  • Depending on the amount of these taxes relative to the $10,000 cap, it may be advisable to split the deduction 50:50 even though H provided substantially more funds to the account.
  • This also provides W with 50% vs. 20% of the tax deduction if she itemizes deductions on her tax return.

Observations

So, as a practical matter, the parties have some flexibility on the allocation of the property tax deduction. Factors to consider are:

  • Amount of other taxes of each party relative to the $10,000 limit.
  • Funding of the joint account from which taxes were paid prior to the divorce.
  • Whether either party will likely use the increased standard deduction.

It is often advisable to provide for the allocation in the property settlement agreement to avoid post-divorce problems at tax return preparation time.

The following summarizes some general aspects of payments of mortgage interest and property taxes in a divorce context. It is drawn from the author’s Taxation Chapter in ICLE’s Michigan Family Law.

Payments Made in a Divorce Context

The deductibility of mortgage interest, property taxes, utilities, maintenance, etc., in a divorce context depends on the following:

  • ownership of the home
  • use of the home as a personal residence
  • liability on the mortgage loan
  • whether payments are made pursuant to a qualifying divorce or separation instrument.

Ownership. While some homes may be owned individually by one of the spouses during marriage, it is more common that a marital residence is owned by the spouses as tenants by the entireties, a form of ownership that is not severable and that provides survivorship rights for each party. A tenancy by the entireties is converted to a tenancy in common incident to divorce under Michigan law unless an alternative provision is made in the governing divorce instrument. MCL 552.102. Tenants in common do not have survivorship rights but do have a severable half interest in the home. It is not unusual for one of the parties to be awarded the family residence, often the custodial parent in cases involving minor children. It is also common for such a home to be owned as tenants in common subject to sale when the youngest child reaches the age of majority or graduates from high school.

As explained below, the form of ownership may affect the deductibility of payments related to the residence.

Use of the Home as a Qualifying Residence. IRC 163(h) permits the deduction of home mortgage interest, or “qualified residence interest,” on a taxpayer’s principal residence and a second qualifying home used by the taxpayer as a residence. If a noncustodial parent vacates the family residence and lives elsewhere, he or she may select the family residence as an “other residence” provided he or she uses the home for personal purposes for at least 14 days during the year. In this regard, the use of the home by a taxpayer’s child—again, for as little as 14 days—is attributed to the taxpayer. IRC 280A(d)(1).

IRC 164(a) allows a taxpayer to deduct property taxes that he or she (1) pays and (2) is personally obligated to pay. The obligation to pay generally tracks with ownership.

Liability on the Mortgage Loan. Spouses who own their marital residence as tenants by the entireties usually have joint and several liability on the mortgage loan on which the home is pledged. It is also not uncommon for both parties to remain jointly and severally obligated on the loan after the divorce since lending institutions often will not release one party from the debt even if the other has been assigned full responsibility for its payment in the divorce settlement.

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… “Strategy for Allocating the Property Tax Deduction in Year of Divorce to Minimize Effect of New Limits on Deducting Taxes”
View / Download December 2018 Article – PDF File

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