Posts by Joseph W. Cunningham, JD, CPA

June / July 2020 : Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download June-July 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W both had pensions to divide after a nineteen year marriage.
  • W had a Michigan county pension and H a Michigan public school pension.
  • A CPA testified that there were two basic differences in the pensions:
    1. H’s school pension included an automatic COLA provision (MIP) by which it would increase by 3% a year. W’s county pension had no such provision.
    2. Also, H’s school pension allowed an alternate payee to access his/her share before the participant retired.
      W’s county pension, however, did not allow alternate payee access until the participant actually retired.
  • H, 45 years old, could retire at age 48 and intended to do so. He was free to seek other employment after retiring. W, also 45, had to wait until age 60 to retire.
  • The CPA proposed a partial offset method to adjust for the differences in the two pensions.
  • The trial court ruled that “the most equitable method for division” was to award each party a 50% interest in the other’s pension.
  • H appealed, claiming in part that when he retired at age 48, he could not live on half of his pension.
  • He also claimed that his ability to work after retiring would be relevant only if the court were determining an award for spousal support.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision.
  • Essentially, the Court ruled that both pensions, with their respective features, were marital assets and that dividing them equally was appropriate.
  • The Court also noted that earnings ability is relevant to property distribution as well as to spousal support.

Comments on the Case

  • Since H stated no reason (e.g., health) why he could not work after retiring at age 48, his claim was not very persuasive.
  • Determining the present values of the two pensions would not likely have provided a workable solution in this case. Reason – H’s pension would probably have been far more valuable than W’s pension – making an offset not feasible because:
    1. It was payable from age 48 for life vs. W’s being payable from age 60 for life.
    2. The twelve extra years were earlier, more valuable years in the present value calculation.
    3. H’s pension increased each year whereas W’s did not.
  • Though not an issue in the Reed case, whenever dealing with a Michigan public school pension, one needs to be mindful of recoupment.
    Recoupment occurs if (1) the alternate payee begins drawing his/her share before the participant (1) is age 60 and (2) retires, and (2) the participant works beyond normal retirement age of 60. The resulting reduction of the participant’s bene.t is drastic.
    A way to prevent recoupment is to provide that the alternate payee cannot begin drawing before the participant reaches age 60.

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… “Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)”
View / Download June-July 2020 Article – PDF File

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

Read More “June / July 2020 : Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)”

May 2020 : “Double Dipping”

Posted by Joseph W. Cunningham, JD, CPA

View / Download May 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Similar to Michigan law, the Ohio Court of Appeals rejected the arbitrary limiting of owner spouse’s income in determining spousal support to avoid “double dipping.” Kim v. Kim, 2020-Ohio-22 (1/8/2020).

Background

So-called “double dipping” occurs if these four conditions are met:

  1. The business or professional practice (enterprise) owned by one spouse (owner spouse) is valued by capitalizing excess earnings (or cash flow).
  2. Part of such excess earnings results from reducing owner spouse’s actual compensation from the enterprise to a “market” – or, “normal” level, reasonable compensation.
  3. The capitalized value of the enterprise is included in the marital estate divided between the parties.
  4. The total amount of the owner spouse’s compensation is included in determining income available for spousal support.

Example: H owns 100% of ABC Company (ABC). His average compensation from ABC is $200,000 annually. Reasonable compensation for his services, based on industry statistics, is $100,000.

If H’s actual compensation of $200,000 is used for determining spousal support, “double dipping” occurs since $100,000 of his actual compensation has been incorporated in the $1,200,000 value of ABC included in the marital estate divided between him and W. To avoid double dipping, H’s income for determining spousal support would be limited to $100,000.

Kim Case

Facts

  • H owns and works at two businesses from which his average compensation is $520,000 annually.
  • In calculating the value accepted by the trial court, H’s expert determined H’s “reasonable” or “market” compensation at $416,000.
  • The trial court used H’s total compensation – $520,000 – in determining spousal support.
  • It stated that, based on the circumstances of the case, equity does not require limiting H’s income for support purposes to avoid double dipping. In this regard, the court noted various factors indicating that H was in a much stronger financial position than W.
  • H appealed the court’s decision.

Court of Appeals Decision

  • The Court of Appeals (Court) upheld the trial court decision.
  • In so ruling, the Court stated that it agreed with the analysis made in another Ohio case that the statute “precludes an outright prohibition of double dipping” and that the trial should, “in the interest of equity,” consider the effects of double dipping.
  • In Kim, the Court noted that the trial court cited circumstances that were “overriding the unfairness of double dipping.”

Relevance to Michigan

Ohio, like Michigan, is an “equitable distribution” state. As we know, equitable distribution does not mean equal distribution to divorcing parties. Rather, trial courts have considerable discretion in tailoring a settlement to the equities of a case.

Double Dipping in Michigan – Loutts v. Loutts, Mich App No. 297427 (9/4/12)

  • The Michigan Court of Appeals (COA) published decision in Loutts is consistent with the Ohio Kim decision and COA decisions in four previous Michigan unpublished decisions on “double dipping.”
  • Essentially, the COA ruled that:
    • The effect of “double dipping” can be taken into account in determining spousal support to achieve a proper balancing of incomes and needs.
    • Hence, arbitrary limiting of the owner spouse’s income to avoid double dipping on a “bright line” basis is improper pursuant to MCL 552.23 and case precedents on using formulaic approaches to determining spousal support.
    • However, if not needed to achieve a proper balancing of incomes and needs, double dipping should be avoided.

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… “Double Dipping”
View / Download May 2020 Article – PDF File

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

Read More “May 2020 : “Double Dipping””

Apr 2020 : Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Posted by Joseph W. Cunningham, JD, CPA

View / Download April 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Families First Coronavirus Response Act (FFCRA)

On March 18, 2020, the Families First Coronavirus Response Act (FFCRA) was enacted. It requires certain employers to provide up to eighty (80) hours (two weeks) of paid sick leave occasioned by COVID-19 and up to ten (10) weeks additional family medical leave at two-thirds regular pay to care for a child due to the closure of a school or child care facility.

FFCRA applies to certain public employers and private employers with fewer than 500 employees.

Small businesses with fewer than fifty (50) employees may qualify for an exemption from the requirement to provide family leave due to school or child-care closings if it would jeopardize the business’ viability.

Employees qualify for paid sick time if unable to work
due to:

  • A federal, state, or local quarantine order.
  • Advise from a health care provider to self-quarantine
  • Having COVID-19 symptoms and is seeking medical diagnosis.
  • Caring for an individual in COVID-19 quarantine.
  • Caring for a child whose school or child-care facility is closed due to COVID-19.

CARES

On March 27, 2020, CARES (the Act) was signed into law. It is intended as an economic stimulus to mitigate the devastating impact of the COVID-19 pandemic.

The Act provides over $2 trillion in wide-ranging financial relief to hard-pressed medical centers, individuals, and small businesses.

As this article goes to press, there is speculation that an additional relief bill may be necessary due the catastrophic effects of COVID-19.

The following presents some of the more significant provisions of FFCRA and the Act affecting families.

Direct Payments to Individuals

How Much?

Individuals with a gross income of $75,000 or less who filed a 2019 or 2018 tax return will receive $1,200. Married couples with gross income of $150,000 or less will receive $2,400. For those .ling as head of household, the gross income limit is $112,500. In addition, $500 will be received for each child under the age 17, for whom a Social Security number was included on the tax return.

For those receiving Social Security but who did not have sufficient income to require .ling a tax return, the IRS will use the person’s SSA-1099, Social Security Bene.t Statement to determine the payment.

Phase-Out

There is a phase-out of the cash payment for single individuals with gross incomes between $75,000 and $99,000 and for married couples with gross incomes between $150,000 and $198,000. The phase-out is 5% of the gross income over the limit.

For example, for an individual with gross income of $85,000, the payment would be $700 -$1,200 – ($10,000 X 5%).

No payment will be received by those with gross incomes exceeding the $99,000/$198,000 upper phase-out limits.

When Will Payments Be Received?

Treasury Secretary Steven Mnuchin said most people will receive their checks within three weeks.

Many believe that mid to late April is a realistic time frame.

The Act provides that the government shall mail a paper notice within a few weeks of when the payment was sent.

Expanded Unemployment Benefits

Extra Payment

The Act provides that eligible workers will receive an additional $600 a week in excess of the state unemployment benefit.

Duration of Payments

The Act also extends the period during which unemployment can be drawn by 13 weeks. So, Michigan’s 20-week annual limit is increased to 33 weeks.

Eligible Workers

The Act expands the pool of workers eligible for unemployment benefits. Independent contractors, part-time workers, “gig” workers, and freelancers are newly eligible.

And, people who need to cease working due to COVID-19 also may qualify. So, if a facility providing child-care, or elderly care, shuts down because of coronavirus such that a person needs to stop working to provide the care, he/she is eligible for unemployment benefits.

Retirement Accounts

10% Penalty Relief

For withdrawals from IRAs or 401(k) accounts during 2020 necessary because of COVID-19, there will be no 10% early withdrawal tax for those under 59.5 years of age.

People qualify if they, a spouse, or dependent test positive, or if they experience other negative economic consequences due to the pandemic.

Relief For Federal Student Loan Payments

What Relief?

No payments are due until September 30 – a six-month reprieve. And, no interest accrues during the six months.

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… “Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act”
View / Download April 2020 Article – PDF File

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

Read More “Apr 2020 : Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act”

Mar 2020 : Provisions of the 2019 SECURE Act Relevant to Family Law

Posted by Joseph W. Cunningham, JD, CPA

View / Download March 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

The SECURE Act of 2019

General

The SECURE Act was signed into law on December 20, 2019. “SECURE” is an acronym for “Setting Every Community
Up for Retirement Enhancement.” Most of its provisions (1) expand opportunities for accumulating retirement bene/ts
and (2) take e0ect January 1, 2020.

Penalty Free Withdrawals from 401(k)s and IRAs for Child Care Expenses

Under the SECURE Act, a parent expecting a child – including a newly adopted child – may withdraw up to $5,000 from a 401(k) account or an IRA to cover expenses associated with the child without incurring the 10% penalty tax on early withdrawals (generally, withdrawals before 59 1/2 years of age). For married couples, up to $10,000 can be withdrawn penalty-free.

Such withdrawals are still subject to regular federal and state income tax. And, of course, such withdrawals result in that much less growing tax-free for retirement.

But, for relatively young parents in a relatively low tax bracket, accessing funds to cover new child expenses can be quite beneficial.

And, for anyone adopting a child, the extra funds can offset some of the significant costs of adoption.

Use of 529 Plan Funds to Pay Student Loans

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

Michigan has established the Michigan Education Savings Program (MESP) – a Section 529 program.
Distributions from such accounts – including earnings – are not taxable provided such distributions do not exceed the
beneficiary’s QHEE.

QHEE 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.

The SECURE Act expands QHEE to include payments on student loans. .is can be particularly beneficial if there is a balance in a 529 account when a student completes his/her education and has student loan debt – a not uncommon occurrence. The 529 funds can be used to pay the student loan. However, such payments are limited to $10,000 annually.

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… “Provisions of the 2019 SECURE Act Relevant to Family Law”
View / Download March 2020 Article – PDF File

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

Read More “Mar 2020 : Provisions of the 2019 SECURE Act Relevant to Family Law”

Feb 2020 : 2020 Federal Income Tax Rates & Brackets, Etc., and 2020 Michigan Income Tax Rate and Personal Exemption Deduction

Posted by Joseph W. Cunningham, JD, CPA

View / Download February 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Federal Income Tax

The following are inflation adjusted tax rates and the standard deduction for 2020 as announced by the IRS (IR-
2019-180).

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… “2020 Federal Income Tax Rates & Brackets, Etc., and 2020 Michigan Income Tax Rate and Personal Exemption Deduction”
View / Download February 2020 Article – PDF File

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

Read More “Feb 2020 : 2020 Federal Income Tax Rates & Brackets, Etc., and 2020 Michigan Income Tax Rate and Personal Exemption Deduction”