Taxes

June / July 2014 : Designation of Payments as Nontaxable/ Nondeductible

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

General

As indicated by a recent case on which the author was consulted, many attorneys are unaware of IRC Section 71(b)(1) (B) which enables divorcing parties to expressly designate payments from one to the other as nontaxable/nondeductible. In that case, the parties had agreed that one would pay the other after-tax installment payments for a period of years to balance their divorce settlement. Their tax brackets were approximately the same so there was no advantage to converting the after-tax payments to taxable/deductible Section 71 payments.

The question to me was, essentially – Can we structure payments as nontaxable/nondeductible and be assured they will be so treated for tax purposes?

The answer is “yes,” pursuant to IRC 71(b)(1)(B). Just as it is important to include a “tax intent” provision when payments are intended to be taxable/deductible, the same is advisable when they are intended to be nontaxable/nondeductible. Tax intent provisions prevent misunderstandings down the road. Sometimes a tax preparer may suggest payments are deductible by the payer when such was not intended. A tax intent provision avoids this possibility.

The following is sample generic language for a nontaxable/nondeductible tax intent provision:

“Defendant’s payments of [property/spousal support] to Plaintiff provided in paragraph [ ] are hereby designated by the parties, pursuant to IRC Section 71(b)(1)(B), as not includable in Plaintiff’s income under IRC Section 71 and, correspondingly, not deductible by Defendant under IRC Section 215. Plaintiff and Defendant agree that neither will file an income tax return on which subject payments are reported inconsistently with their expressly designated nontaxable/nondeductible status.”

Other Uses

Lump-Sum Payable on Death of Payer – ……

Continued in PDF file below… “Designation of Payments as Nontaxable/ Nondeductible”
View / Download June/July 2014 Article – PDF File

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

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May 2014 : Selected Tax Provisions Related to Children of Divorce – Part 2

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following presents basic information regarding two additional federal income tax provisions applicable to divorced or legally separated parents with one (or more) dependent child. Two other such provisions were presented in the April 2014 column.

Earned Income Credit

General Rule

IRC Section 32 provides for a refundable tax credit for taxpayers (1) with adjusted gross incomes (AGIs) under certain limits and (2) who have earned income. As indicated below, the credit increases significantly for taxpayers with one or more qualifying children.

To qualify, a taxpayer’s 2014 AGI must be less than:

  • $14,590 ($20,020 if married filing jointly) with no qualifying children
  • $38,511 ($43,941 if married filing jointly) with one qualifying child
  • $43,756 ($49,186 if married filing jointly) with two qualifying children
  • $46,997 ($52,427 if married filing jointly) with three or more qualifying children

The credit begins to phase out for taxpayers with one or more qualifying children who have a 2014 AGI of $17,530 or more and an AGI of $7,970 or more if no qualifying children. e phase-out continues from these AGIs through the amounts shown above.

Also, a taxpayer’s investment income – interest, dividends, capital gain, etc. – cannot exceed $3,350 in 2014.

The maximum credit for 2014:

  • $496 with no qualifying children
  • $3,305 with one qualifying child
  • $5,460 with two qualifying children
  • $6,143 with three or more qualifying children

The requirements for “qualifying child” are essentially the same for claiming a dependency exemption for a child.

“Earned income” includes salaries, wages, other forms of employee compensation, and self-employment income.
e IRS will calculate the credit. For taxpayers who want to calculate the credit, there are tables included in both 1040 and 1040A instructions.

Example

John and Mary, who file jointly, have:

  • Earned income of $25,000.
  • Investment income of $1,000
  • Two qualifying children

Because their $26,000 AGI is less than the $49,186 limit and their $1,000 investment income does not $3,350, they are entitled to the earned income credit (EIC). They refer to the EIC table in the 1040A instructions and find their credit is $4,813.

Practice Pointers
……

Continued in PDF file below… “Selected Tax Provisions Related to Children of Divorce – Part 2”
View / Download May 2014 Article – PDF File

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

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April 2014 : Selected Tax Provisions Related to Children of Divorce – Part 1

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following presents basic information regarding two federal income provisions applicable to divorced or legally separated parents with one (or more) dependent child. In next month’s column, additional child-related provisions will be presented.

Dependency Exemptions

General Rule

IRC Section 152(e) provides that if the parents, on a combined basis, (1) provide more than half a child’s support for the year and (2) have physical custody for more than half the year, then the parent having physical custody for more than half the year (the custodial parent) is entitled to the exemption.

The custodial parent may “release” the exemption to the other parent by executing a written waiver for (1) one year, (2) a specific number of years, or (3) all future years. IRS Form 8332 is the waiver that the custodial parent must execute to release the exemption. e non-custodial parent must attach the executed Form 8332 to his/her tax return for the year(s) for which the exemption has been released.

Other Aspects of the Dependency Exemption

  • The above applies to parents living apart for the last six months of the year as well as to divorced or legally separated parents.
  • “Physical custody” for more than half the year is deter- mined based on overnights. If overnights are equal, the parent with the higher adjusted gross income is deemed the custodial parent.
  • The waiver can be used to, effectively, provide that the parents will claim the exemption in alternating years.
  • Support provided by a parent’s new spouse, or his/her parents, is deemed provided by the parent.
  • The custodial parent may revoke the waiver by executing Part III of Form 8332. Such a revocation applies to the succeeding tax year.
  • The federal income tax exemption amount is $3,950 for 2014. It is also $3,950 for 2013 Michigan Income Tax (the amount for 2014 has not been released, but will not likely be less than $3,950).

Phase-Out of the Tax Benefit of Personal and Dependency Exemptions

The phase-out of the tax benefit of personal and dependency exemptions for high income taxpayers was repealed for 2010-2012, but reinstated as of January 1, 2013.

The adjusted gross income (AGI) amounts at which the phase-out applies are as follows for 2014:
(Table shown in PDF file below)
……

Continued in PDF file below… “Selected Tax Provisions Related to Children of Divorce – Part 1”
View / Download April 2014 Article – PDF File

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

Read More “April 2014 : Selected Tax Provisions Related to Children of Divorce – Part 1”

March 2014 : Lesser Known Federal Income Tax Filing Tips and Related Info

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

This is the time of year when income tax filing questions arise. The following presents selected tax filing tips and related information somewhat off the beaten path.

Joint Income Tax Returns

It is widely known that if a couple is legally married as of December 31, the couple may file a joint tax return for the year. This is often beneficial if one spouse has substantially more income than the other – usually resulting in the higher level income taxable in a lower tax bracket. In such situations, it is not uncommon for divorces concluding late in a calendar to defer entry of judgment into the succeeding year to take advantage of joint tax return filing one last time.

Whenever a joint return may be filed for a year and it is certain the parties will be divorced in the following year, the following matters may be relevant.

Joint and Several Liability

Parties will be jointly and severally liable for unpaid taxes and/or deficiencies later arising from an IRS tax examination. So, if it is suspected that one spouse is underreporting income and/or claiming excessive deductions, it is generally advisable that the other spouse not agree to file jointly.

While Innocent Spouse Relief protects some unwary joint filers from liability, such protection may not be available if a spouse had reason to believe that income is understated or deductions are padded.

Take Away – Consider potential liability before agreeing to le jointly to achieve tax savings.

Joint Tax Refunds

Most divorce settlements provide for the division of a tax refund on the final joint return. e check will be sent to the address on the return and will be payable to both parties. us, delay in receipt of a refund may result if the principal residence is used on the return and the refund is sent after the house is sold and the effective “forwarding address” period has expired. If this is forseeable, use another address on the return (e.g., in care of the CPA/tax preparer).

Take Away – Consider any potential logistical problems concerning receipt of a joint tax refund and make appropriate arrangements.

Joint Tax Overpayments Applied to Estimated Tax
……

Continued in PDF file below… “Lesser Known Federal Income Tax Filing Tips and Related Info”
View / Download March 2014 Article – PDF File

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

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February 2014 : 2014 Federal Income Tax Rates & Brackets, Etc., and Selected IRS Publications 2014 Federal Income Tax Rates & Brackets and Related Information

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following presents the 2014 tax rates applicable to taxable income of taxpayers filing tax returns as single, married filing jointly, or head of household.
(Table shown in PDF below)

Standard Deduction

  • Single … $ 6,200
  • Married Filing Jointly … $12,400
  • Head of Household … $ 9,100

Personal Exemption

The personal exemption for 2014 is $3,950. 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 PDF below)
……

Continued in PDF file below… “2014 Federal Income Tax Rates & Brackets, Etc., and Selected IRS Publications 2014 Federal Income Tax Rates & Brackets and Related Information”
View / Download February 2014 Article – PDF File

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

Read More “February 2014 : 2014 Federal Income Tax Rates & Brackets, Etc., and Selected IRS Publications 2014 Federal Income Tax Rates & Brackets and Related Information”