Taxes

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”

Aug/Sep 2022 : Estimated Tax Payments; Tax Refunds & Overpayments

Posted by Joseph W. Cunningham, JD, CPA

View / Download Aug/Sept 2022 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

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.

And, 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 Automatically Are 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.
  3. The same applies to tax overpayments on the parties’ last joint return applied to the following year’s tax.
  4. Estimated Tax Payments and Tax Withheld During Marriage Are Marital Funds – Absent unusual circumstances, estimated tax payments and tax 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.

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 offsetting 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.

Because the IRS credits the account of the spouse who’s SSN appears first on the estimated tax voucher (Form 1040ES) – almost always the husband’s – if the other spouse (assume W) claims any of the joint estimated tax payments on a separate return, W should indicate the ex-spouse’s SSN on page one of her IRS Form 1040 in the designated space. If W has remarried, she should enter the current spouse’s SSN in the appropriate space and enter the ex-spouse’s SSN, followed by “DIV,” on the line at the bottom of page one, where estimated tax payment credits are claimed.

Tax Refunds and Overpayments Applied to Next Year’s Tax

It is common practice to provide for the division of tax refunds resulting from the parties’ final joint income tax return. But, in some cases, parties filing a joint return will apply all or a part of any tax overpayment to the following year’s tax rather than having it refunded. This frequently occurs when a return is on extension and filed after April 15 and the prior year overpayment is needed to cover current year tax to avoid the underpayment penalty.

The IRS has ruled that it will abide by an agreement of spouses who are no longer married regarding the apportionment of an overpayment of tax on a prior year’s joint income tax return that the parties elected to apply to the following year’s tax liability. Rev Rul 76-140.

However, here, too, because the IRS credits the account of the spouse whose SSN appears first on the tax return, if the other spouse claims any of the applied overpayment, the other spouse should indicate the ex-spouse’s SSN on page one of his or her IRS Form 1040 in the designated space. If the other spouse has remarried, he or she should enter the current spouse’s SSN in the appropriate space and enter the exspouse’s SSN, followed by “DIV,” on the line at the bottom of page one, where estimated tax payment credits are claimed.

Practice Pointers

  1. Discover Tax Situation – As part of discovery, the tax overpayment or underpayment status of the parties should be determined. This can often be provided by the parties’ tax preparer.
  2. Over Withholding – The owner of a closely-held business can arrange excessive tax withholding. If undetected, the money that should be in marital accounts to divide will instead accrue 100% to the owner as a tax refund. The excessive withholding can be done on the last day of the year. So, the fact that withholding was not excessive on a September 30 pay stub is not a reliable safeguard against withholding manipulation.
  3. Rather, the owner’s W-2 should be reviewed for the relationship between (1) income and (2) income tax withheld to discover whether there is excessive withholding.
  4. Specific Divorce Settlement Provisions – In addition to discovering the parties’ “tax situation,” the settlement agreement should include express provisions regarding matters such as division of refunds, splitting joint estimated tax on separate returns, and ensuring an equitable sharing of tax on marital income for the year of divorce.

IRS Publication 504 – “Divorced or Separated Individuals”

This an excellent 30 page summary of divorce taxation. It covers the following topics:

  • Filing Status
  • Exemptions
  • Alimony
  • QDROs & IRAs
  • Property Settlements
  • Tax Withholding and Estimated Tax

Publication 504 was updated in October 2021 and has a 2 page detailed index.

It is available for download at http://www.irs.gov/pub/irspdf/p504.pdf

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… “Estimated Tax Payments; Tax Refunds & Overpayments”
View / Download Aug/Sept 2022 Article – PDF File

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

Read More “Aug/Sep 2022 : Estimated Tax Payments; Tax Refunds & Overpayments”

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”

Jan 2020 : State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property

Posted by Joseph W. Cunningham, JD, CPA

View / Download January 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

General

For most Michigan transfers of ownership of real property, there are two tax adverse consequences:

  1. The Michigan Real Estate Transfer Tax imposes a tax of $3.75 for every $500 of value transferred. Additionally, the county transfer tax rate is $.55 for every $500 of value transferred.
    .
    So, the total transfer tax on $50,000 of property transferred is $2,150.
  2. Transfers of Ownership result in the “uncapping” of the taxable value of the transferred property.
    .
    This can be significant since the annual increase in taxable value for property tax purposes is otherwise limited by law to 5% or the rate of inflation, whichever is lower.
    .
    So, for property held for several years which has appreciated significantly in value, a transfer will likely result in a substantial increase its taxable value for property tax purposes.

Exemptions Applicable to Divorce Related Transfers

The following are exemptions that avoid both (1) imposition of a transfer tax and (2) the uncapping of taxable value.

  1. Transfers pursuant to a judgment provided no money is ordered by the court to be paid as consideration for the transfer are exempt. MCL 207.526(l); MCL 211.27a(7)(h)
  2. Transfers between spouses creating or disjoining a tenancy by the entireties are also exempt. MCL 207.526(j); MCL 211.27a(7)

Observations

  1. Apparently, a divorce related transfer occurring after divorce–when the parties are no longer spouses–for which money consideration is paid–does not fall within either exemption.
    .
    In such an instance, no consideration should be specifically provided for the transfer.
  2. And, if relying on the “pursuant to judgment” exemption, it seems advisable to provide for the transfer in the divorce judgment instead of, or in addition to, the property settlement agreement.

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… “State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property”
View / Download January 2020 Article – PDF File

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

Read More “Jan 2020 : State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property”

Oct 2019 : Taking Taxes Into Account In Property Settlement Involving “Pre-Tax” Assets – Huggler v Huggler, Mich App. No. 343904 (6/25/19)

Posted by Joseph W. Cunningham, JD, CPA

View / Download October 2019 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • Of their marital estate of around $800,000, the parties agreed as follows:
W H Total
Real Estate, Investments, Bank Accounts, and Personal Property 71,488 384,929 456,417
Retirement Assets – Pre-Tax 273,896 71,488 345,384
  • Because W was to receive a disproportionate amount of pre-tax assets, they further agreed that (1) H would pay W $154,618 of “Non-Retirement Assets” and (2) W would assign to H via a QDRO $101,204 from her retirement assets.
  • This would result in the following equal division of pre-tax retirement benefits:
W H Total
Real Estate, Investments, Bank Accounts, and Personal Property 226,106 230,311 456,417
Retirement Assets – Pre-Tax 172,692 172,692 345,384
  • Notwithstanding this agreement, H and W disagreed as to how the $154,618 balancing payment would be made. W wanted to receive the $154,618 in non-retirement assets. But H wanted to pay her $54,618 in cash and net the other $100,000 against the $101,204 retirement transfer due him from W.
  • W objected because it would leave her with a disproportionate share of pre-tax assets, as follows:
W H Total
Real Estate, Investments, Bank Accounts, and Personal Property 126,106 330,311 456,417
Retirement Assets – Pre-Tax 272,692 72,692 345,384
  • W claimed that she intended to access the $100,000, which in doing so would result in both income taxes and a penalty tax leaving her considerably less than what she had coming per the agreement.
  • She stated that she would “incur predictable and foresee-able tax penalties to cash in the retirement funds.”
  • The trial court ruled in H’s favor ruling that it would not consider the tax consequences of the division of assets be-cause “it would be forced to speculate when – or even if – she would cash in the accounts.”
  • W appealed.

Court Of Appeals Decision

The Court upheld the trial court decision, ruling in part that W “had not established that the tax consequences were reasonably likely to occur and were not merely speculative.”

Comments On The Case

1. General Practice in Michigan—Michigan family law judges do not typically reduce the value of assets by future tax unless the tax is imminent or otherwise not subject to speculation.

Nor are they required to, as the Court stated, under Nalevayko v Nalevayko, 198 Mich App 163 (1993).

2. Pre-Tax Assets – But, certain assets – employee benefits such as 401(k) accounts, IRAs (other than Roth IRAs), bonuses, and various forms of incentive pay – (1) are certain to be taxed and (2) generally provide no benefit to the employee spouse until he or she squares off with Uncle Sam and pays the tax.

Thus, unlike other investments, real property, and closely-held businesses, the various forms of retirement benefits and employee/executive compensation are generally tax affected for divorce settlement to the extent they are not divided equally.

Not to do so would result in an inequitable settlement to the party receiving more than half of pre-tax benefits, such as W in Huggler.

Simple Example – If one party receives a $10,000 bank account and the other a $10,000 pre-tax IRA, the divi-sion is not equal. Before the IRA funds can be converted to spendable cash, a tax must be paid resulting in a net amount of considerably less than $10,000.

3. Calculation of the Tax – The calculation of the tax can, however, be subject to dispute.

One approach is to allocate a portion of the total tax on a pro rata, or proportional, basis – the Average Tax method.

Another is to calculate the tax resulting from adding subject benefits on the tax return – the Marginal or Incremental Tax method. This calculation usually involves (1) calculating tax with the benefits included and (2) running the calculation without them. The difference is the tax attributable to the benefits.

The theory supporting the Average Tax method is that who is to say what component – or layer – of income is taxable at the lower rates on the tax rate schedule and which are taxable at higher rates. Hence, using an aver-age rate is fair – treating all dollars of income the same. It seems the average rate approach is better suited to elements of income routinely received by and taxable to the taxpayer spouse – such as a bonus received each year.

Correspondingly, the marginal approach seems more apt for items not part of the annual pay package, such as stock options issued periodically or, certainly, severance pay.

Illustration

Taxable Income Assuming:
Basic Comp Only Add Non-Recurring Incentive Pay Total
Taxable Income 100,000 50,000 150,000
Federal Tax (Rounded) 35,500
Average Tax Rate 23.7%
Marginal Tax Rate 28%
Tax Affected Value of $50,000:
– Less average tax: 50,000 – (23.7% x 50,000) = 38,150.
– Less marginal tax: 50,000 – (28% x 50,000) = 36,000.

And, of course, the difference is more dramatic if larger non-recurring benefits result in taxation at the top rate of 37%, vs. 28% in the example.

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… “Taking Taxes Into Account In Property Settlement Involving “Pre-Tax” Assets – Huggler v Huggler, Mich App. No. 343904 (6/25/19)”
View / Download October 2019 Article – PDF File

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

Read More “Oct 2019 : Taking Taxes Into Account In Property Settlement Involving “Pre-Tax” Assets – Huggler v Huggler, Mich App. No. 343904 (6/25/19)”