Taxes

December 2015 : US Treasury and IRS Issue Proposed Regulations on Federal Tax Aspects of Same Sex Marriage

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

View Full PDF file

As has been well chronicled, the US Supreme Court ruled, in its June 26, 2015 Obergefell v. Hodges landmark decision, that under the equal protection clause of the 14th Amendment, states must issue a marriage license to same sex couples who choose to marry and who otherwise qualify.

On October 21, 2015, the US Treasury and Internal Revenue Service (IRS) issued Proposed Regulations implementing the Supreme Court’s decision for federal tax purposes.

Background

  • In 2013, the IRS issued a revenue ruling providing that same sex marriages that are legally valid in the state in which the marriage was performed are to be recognized as valid marriages for federal tax purposes (Rev. Rul. 2013- 17, Aug. 29, 2013).
  • The IRS ruling followed the US Supreme Court E.S. Windsor case (2013-2 USTC) in which the Court ruled that Section 3 of the 1996 Defense of Marriage Act-based on which the IRS would not recognize same sex marriages for federal tax purposes–was unconstitutional.
  • Thus, for all states that then recognized same sex marriage, such couples married pursuant to state law were considered married for federal income, estate, and gift tax purposes.
  • But, married status for tax purposes does not include civil unions, domestic partnerships, or similar relationships not recognized as marriage under state law.

New Proposed Regulations

  • The new Regulations essentially adopt the provisions of Rev. Rul. 2013 -17 and make it clear that they now apply in all states.
  • As under the revenue ruling, married status does not include civil unions, domestic partnerships, or similar relationships not recognized as marriage under state law.

Comments on the New Regulations for Same Sex Couples Lawfully Married in Michigan

  • Marital status for income tax purposes affects:
    • Tax filing status;
    • Personal and dependency exemptions;
    • The standard deduction;
    • Earned income tax credit;
    • Child tax credit;
    • Innocent spouse protection; and
    • IRA contributions.
  • Same sex couples must now file as either “married filing jointly” or “married filing separately.” This will be disadvantageous for some couples who would pay lower combined tax filing single status returns, which can be the case if their incomes are relatively close in amount.
  • Married status extends to same sex couples certain estate and gift tax benefits–such as the marital deduction for both estate and gift taxes and the availability of “gift splitting”–essentially, an additional annual exclusion ($14,000 for 2015)–for gift tax purposes.
Continued in PDF file below… “US Treasury and IRS Issue Proposed Regulations on Federal Tax Aspects of Same Sex Marriage”
View / Download December 2015 Article – PDF File

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

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October 2015 : Overview of Unallocated Family Support Payments

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Tax Benefit

  • Combined payments of spousal support and child support – referred to as “family support” – are taxable/deductible under IRC Section 71.
  • Family support is advantageous from a tax standpoint if the support payer (assume H) is in a significantly higher tax bracket than the payee (W).
  • By structuring payments as family support, the child support component – which is generally nontaxable/nondeductible – is converted to taxable/deductible.
  • However, so W is not short-changed, the child support component of the family support payment must be in- creased to cover the tax thereon.
  • To illustrate:
    • H’s average combined federal and state tax bracket is 40% and W’s is 20%.
    • In their divorce settlement, spousal support is $2,500 a month and child support is $1,000.
    • After-tax, the payments are as follows:
      (Table in PDF file)
    • If the child support component is increased to $1,450 and included with spousal support as $3,950 family support, the result is:
      (Table in PDF file)
    • So, by converting child support to family support, Uncle Sam kicks in $3,420 a year, split approximately evenly between H and W.

Requirements to Qualify as Family Support
…

Continued in PDF file below… “Overview of Unallocated Family Support Payments”
View / Download October 2015 Article – PDF File

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

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February 2015 : 2015 Federal Income Tax Rates & Brackets, Etc., and Selected IRS Publications

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

2015 Federal Income Tax Rates & Brackets and Related Information

The following presents the 2015 tax rates applicable to taxable income of taxpayers filing tax returns as single, married filing jointly, or head of household.
(Table shown in below PDF file)

Standard Deduction

  • Single … $6,300
  • Married Filing Jointly … $12,600
  • Head of Household … $9,250

Personal Exemption

The personal exemption for 2015 is $4,000. However, 2% of the personal exemption is “phased out” – or reduced – for each $2,500 – or part of $2,500 – a taxpayer’s adjusted gross income (AGI) exceeds the statutory threshold for subject ling status, as follows:
(Table shown in below PDF file)

Selected IRS Publications
……

Continued in PDF file below… “2015 Federal Income Tax Rates & Brackets, Etc., and Selected IRS Publications”
View / Download February 2015 Article – PDF File

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

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November 2014 : Estimated Tax Payments Part II: Requirements for Spousal Support Recipients to Make Payments–Trap for the Unwary

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Last month’s column covered the need for divorce attorneys to appropriately “capture” as a marital asset estimated taxes paid or withheld in excess of the actual tax liability for the final year of the marriage, or part of a year, as the case may be.

There is also a need for spousal support recipients to be aware of requirements to make federal and state estimated tax payments on alimony income. Unlike with wages and salaries, tax is not withheld on spousal support payments. And, it is not uncommon for newly divorced spousal support recipients to be unaware of the obligation to make estimated tax payments on alimony income.

For federal, state, and, where applicable, city income tax purposes, estimated tax payments are due by April 15, June 15, September 15, and January 15 of the succeeding year. Forms 1040ES and MI 1040ES are used for this purpose for federal and Michigan estimates.

A consequence of not making required estimated tax payments is an underpayment penalty. In addition, of course, it may also result in an unexpectedly large tax liability when April 15 rolls around.
Two exceptions to the imposition of the underpayment penalty are:

  1. The total of tax withheld and timely made estimated tax payments exceeds 90% of the current year’s tax liability.
  2. The total of tax withheld and timely made estimated tax payments exceeds 100% of the prior year’s tax liability.

Example 1 – 90% of Current Year Tax Exception

  • W has annual W-2 earnings of $30,000 and receives spousal support of $4,000 a month.
  • Withholdings of $3,500 more than cover the tax on her $30,000 W-2 income (after reducing same by the standard deduction and exemptions). But, her federal income tax on the $48,000 of alimony income is $10,000 (all taxed at a higher bracket).
  • W should make federal estimated tax payments of $2,500 quarterly to avoid being subject to the underpayment penalty. She should do the same with respect to her state tax on the alimony income, and her city income tax, if applicable.
  • If she does, her $13,500 combined federal tax withheld and timely made estimated tax payments will exceed 90% of her current year tax liability.

Example 2 – 100% of Prior Year Tax Exception in First Year After Divorce
……

Continued in PDF file below… “Estimated Tax Payments Part II: Requirements for Spousal Support Recipients to Make Payments–Trap for the Unwary”
View / Download November 2014 Article – PDF File

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

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October 2014 : Estimated Tax Payments and Taxes Withheld During Pendency of Divorce Proceedings

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

It is generally accepted that income earned during marriage–including, absent an agreement to the contrary, income earned during the pendency of divorce proceedings–is marital.

Thus, quarterly estimated income tax payments made and income taxes withheld on salary/wages during marriage consist of marital funds applied to current year federal and state income tax obligations.

This aspect of divorce often receives scant attention from family law attorneys. Particularly when one party is in a position to “manipulate” estimated tax payments and/or taxes withheld, counsel for the other party should not overlook the possibility his/her client could be meaningfully short-changed.

Example 1

H owns a company (ABC) that operates as an LLC. Thus, ABC’s income “passes through” and, accordingly, is taxable to H on his personal income tax return. Thus, H makes quarterly estimated income tax payments to cover the taxes on the ABC pass-through income. Though both his and W’s names and SSNs are on the estimated tax forms he files, the tax payments will be credited to his SSN.

They have reached a divorce settlement and entered a judgment on September 30, 2014. ABC’s income and corresponding estimated income tax payments are as follows:

  • H’s ABC pass-through income for 2014 is projected at $120,000.
  • His federal and state income tax on the $120,000 is projected at $36,000.
  • H, with the divorce in mind, made estimated tax payments of $15,000 in each of April, June, and September 2014 – a total of $45,000.

Here’s how this plays out:
(Table shown in PDF file below)

……

Continued in PDF file below… “Estimated Tax Payments and Taxes Withheld During Pendency of Divorce Proceedings”
View / Download October 2014 Article – PDF File

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

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