Recent Articles

Mar 2021 : IRS Releases Federal Income Tax Data

Posted by Joseph W. Cunningham, JD, CPA

View / Download March 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

The IRS released individual federal income tax information for 2018, which was the first tax year after enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017. (Internal Revenue Service, Statistics of Income).

We frequently hear how the federal tax system is tilted toward the wealthy and was made more so by former President Trump’s TCJA. However, the 2018 data released by the IRS indicates that the federal income tax remains considerably progressive.

The following presents some of the information disclosed by the IRS.

The number of tax returns filed in 2018 increased from 2017. However, average tax rates fell across all income levels and total taxes paid declined by $65 billion.

The top 1 percent of taxpayers’ share of total taxes paid increased in 2018 by 1.6% to 40.1%. In fact, since 2001, the share of taxes paid by the top 1 percent rose from 33.2% of the total to 40.1%.

In 2018, the top 50 percent of taxpayers paid 97.1% of total taxes paid while the bottom 50% paid 2.9%.

And, the top 1 percent of taxpayers paid more of the total taxes than the bottom 90 percent combined.

The top 1 percent paid a 25.4% average rate of tax in 2018, while the bottom 50% paid an average of 3.4%. The top 1 percent paid an average tax of $426,639 for the year; the bottom 50% paid an average of $626.

As noted above, as a result of the TCJA, average tax rates declined for all taxpayers. The bottom 50% – making $43,614 or less – saw a 15% drop in their average tax rate from 4.0% in 2017 to 3.4% in 2018.

For the top 1 percent of taxpayers – making $540,009 or more – the average tax rate fell 9% – from 26.8% in 2017 to 24.4% in 2018.

President Biden has proposed increasing federal tax rates applicable to higher income taxpayers.

Former President Obama once proposed a tax on those with $1 million or more in income. This was embraced by some, including billionaire Warren Buffett, who stated the wealthy often pay at lower rates due to favorable tax treatment on capital gains from investments, which are not available to most wage earners.

Federal income taxes are frequently a subject of lively discussion. It brings to mind the old adage – “It depends on whose ox is being gored.”

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… “IRS Releases Federal Income Tax Data”
View / Download March 2021 Article – PDF File

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

Read More “Mar 2021 : IRS Releases Federal Income Tax Data”

Feb 2021 : Tribute to Ken Prather

Posted by Joseph W. Cunningham, JD, CPA

View / Download February 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

My good friend, Ken Prather, passed away on December 27, 2020. He was 87 years old.

Ken practiced Family Law for 57 years. He was a consummate professional. He knew the law inside-out and was passionate about serving his clients.

Ken was a Fellow of the American Academy of Matrimonial Lawyers since 1973. He was a Super Lawyer and was listed in “The Best Lawyers in America.”

He was Chair of the State Bar Family Law Section in 1984. Ken was one of the pioneers in the early days of the Section.

One of my early encounters with Ken was in 1984 when he chaired the Family Law Section, on which I then served. In July 1984, Congress enacted the first overhaul of divorce taxation since 1948. The Family Law Section’s Annual Summer Seminar was a month later – in August. I had previously been appointed by Ken as the first chair of the Section’s Tax Committee.

We presented a program at the Summer Seminar on the new law that featured two national divorce tax experts – Joe Ducanto of Chicago and Marjorie O’Connell of Washington D.C.

Ken was so excited and proud that the Section gave such a top-drawer presentation just a month after the highly significant law had been passed.

I realize that many of you were then just a gleam in your Daddy’s eye; but I know some will remember those days.

Ken had several notable divorce cases. I worked with him on some as his expert.

Ken once told me the story of his representation of Ms. Kretchmer. The case was set for trial shortly after Michigan passed the no-fault divorce law. Ms. Kretchmer alleged egregious fault on the part of her husband and wanted Ken to highlight it in the trial. Ken told her that fault was no longer a factor in divorce cases. She asked Ken if he believed in the power of prayer. He said “yes” and agreed to present the fault allegations.

That case established the precedent that fault can be taken into account as a factor in dividing property, spousal support, and custody.

Ken taught family law for 17 years at the University of Detroit Mercy. I had the honor of guest lecturing at his classes on how taxes affected family law.

About four years ago, Ken and I were working on a difficult case. Ken was then 83. At one point he sighed heavily and said that this was his last case. Six months later he called me to work on a new case. He so loved family law that it was difficult for him to bring down the curtain.

Ken was an avid reader and a patron of the arts. He possessed a lively sense of humor.

He was generous and compassionate. He cared about the well-being of others. He was a great person as well as a skilled attorney.

And, Ken was an outstanding athlete – playing college basketball at the University of Detroit. He also was an excellent tennis player.

It is difficult to say goodbye to a friend and so it is with Ken. But, it is consoling to know that he had a full life – leaving a loving family, fast friends, and a remarkable imprint in the area of law he so loved and was so devoted to.

Ken’s obituary included one of his favorite Reflections by William Penn:

“I shall pass through life but once. If therefore, there is any kindness I can show, or any good
 
I can do any fellow being, let me do it now! Let me not deter or neglect it, for I shall not pass this way again.”

Ken was exemplary of living Penn’s Reflection.

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… “Tribute to Ken Prather”
View / Download February 2021 Article – PDF File

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

Read More “Feb 2021 : Tribute to Ken Prather”

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”

Dec 2020 : Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)

Posted by Joseph W. Cunningham, JD, CPA

View / Download December 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts:

  • As part of their 2005 Settlement Agreement, H was obligated to pay W $1,000 principal & interest payments a month over 12 years on a $175,000 debt to her.
  • The obligation was to be secured by certain real property and, further, H was to sign a “mortgage note” – which he never did.
  • Interest on the obligation was provided as “accruing interest as a traditional mortgage note in the amount of 3.75%.”
  • After the final payment in 2017, W claimed that H owed her over $50,000 in accrued interest.
  • H claimed that a simple interest rate should apply resulting in accrued interest of $6,250.
  • W’s expert testified that “a traditional mortgage note meant a bank mortgage calculated under an amortized interest schedule” – which means interest compounded monthly.
  • H’s expert testified that, without a note, he could not determine the interest owing.
  • In short, the trial court applied laches and ruled that, because W did not seek to enforce the provision that H sign a note, H’s interest calculation should apply.
  • W appealed.

Court of Appeals Decision

  • In pertinent part, the Court ruled that the language in the Settlement Agreement providing for “interest as a traditional
    mortgage note in the amount of 3.75%” was not ambiguous and, accordingly, that the trial court erred by adopting H’s calculated simple interest.
  • It also held that the trial court could not sua sponte raise the defense of laches. H had not claimed laches as a defense but rather that W’s calculation was incorrect.
  • The case was remanded so that the accrued interest owing would be calculated as it would be under a traditional mortgage note.

A Better to Way to Provide for Interest on a Divorce-Related Installment Obligation

  • The IRS has ruled that interest on an obligation between divorced spouses is “personal interest” and, hence, not deductible by the payor.
  • But, it is nonetheless taxable to the payee.
  • To avoid this tax whipsaw, the interest rate can be converted to its lower, after-tax equivalent and “baked in” to the payments.
  • For example, 2.5% is the approximate after-tax equivalent of a 3.5% pre-tax rate for an individual in a 25 percent tax bracket.
  • The first step is to calculate the payment by running an amortization schedule using the after-tax rate – 2.5% in the above example. Then provide in the divorce document for the payor to make the payments with no stated interest.
  • The use of an unstated after-tax rate avoids having the payee pay tax on interest the payor cannot deduct.
  • This is a viable approach since the IRS has stated that the imputed interest rules do not apply to divorce settlement obligations. Tech Adv Mem 200624065 (Dec 6, 2005); Priv Ltr Rul 8645082 (Aug 14, 1986).
  • Prepayment can be accommodated by providing for a discount equal to the after-tax rate applied to the remaining payments over the period they are scheduled to be paid. Here is a sample clause:

    “Plaintiff is entitled to prepay this obligation, either in full or in part, by making payments in excess of the required payments. If Plaintiff does prepay the obligation, in full or in part, [he / she] is entitled to a discount on the remaining balance of the installment payments equal to 2.5 percent of the amount prepaid for each year (prorated for a partial year) between when the prepayment is made and when such amount would otherwise be due pursuant to the terms provided above.”

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… “Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)”
View / Download December 2020 Article – PDF File

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

Read More “Dec 2020 : Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)”

Nov 2020 : Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)

Posted by Joseph W. Cunningham, JD, CPA

View / Download November 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • After a 35-year marriage, H and W agreed to a settlement which provided, inter alia, that (1) H was awarded his pension – “free and clear of any claim” of W – and (2) W received the marital residence which had an equity of around $100,000.
    • However, they asked the trial court to determine spousal support. The judge awarded W, who had some health issues, permanent spousal support of $2,000 a month.
    • The judge notified the parties that H could ask for spousal support to be modified when he retired.
    • When H did retire, he took an approximately $440,000 lump sum pay-out for his pension which is what he had to live on for the rest of his life.
    • H petitioned the court to terminate spousal support since his only source of income was his pension which he received as his property in the settlement.
    • The trial court, after reviewing the circumstances of each party – including the disparity between $440,000 pension and the $100,000 home equity – reduced spousal support to $961.50, calculated by taking the approximate $300,000 difference and dividing it by W’s life expectancy.
    • H appealed.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision to reduce, but not terminate, spousal support.
  • But, the Court ruled that the trial court failed to consider several relevant factors including:
    • The taxes H had to pay on receipt of the lump-sum;
    • That contributions were likely made to H’s retirement after the divorce and, hence, were not marital; and,
    • That the lump-sum was all H had to live on for the rest of his life.
  • The Court noted that the parties agreed that H would have the pension as his property and, further, that once an asset is awarded, it “is not subject to invasion by the former spouse, even indirectly, which is precisely what occurred when the trial court … considered the pension” as H’s income for determining spousal support.
  • However, the Court also noted that a previously awarded pension is a consideration in balancing the “incomes and needs of the parties in a way that will not impoverish either party.”
  • Thus, the Court remanded the case so that the trial court takes these factors into account.

Comments on the Case

  • The Court’s ruling is essentially as follows:
    • Income from a retirement bene/t awarded as property in a divorce settlement may not be included as income in a subsequent modification of spousal support.
    • But, such income is properly a consideration when doing so because the principles governing modification of spousal support are that “support must be just and reasonable under the circumstances and should balance the incomes and needs of the parties” so as not to impoverish either.
    • The tension between these two principles presents a tightrope to tread in attempting to achieve an equitable result in the “case specific” nature of divorce.

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… “Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)”
View / Download November 2020 Article – PDF File

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

Read More “Nov 2020 : Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)”