Thursday, August 13, 2009

Tax Facts About The Home Office Deduction

With technology making it easier than ever for people to operate a business out of their house, many taxpayers may be able to take a home office deduction when filing their 2009 federal tax return next year.
Here are five important things the IRS wants you to know about claiming the home office deduction.
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
  • As your principal place of business, or
  • As a place to meet or deal with patients, clients or customers in the normal course of your business, or
  • In the case of a separate structure which is not attache d to your home, it must be used in connection with your trade or business
For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
2. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
3. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
4. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction. Report the deduction on line 30 of Schedule C, Form 1040.
5. Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.
For more information see IRS Publication 587, Business Use of Your Home, available on or by calling 800-TAX-FORM (800-829-3676).

Monday, August 3, 2009

IRS Warns Taxpayers to Beware of First-Time Homebuyer Credit Fraud

IR-2009-69, July 29, 2009
WASHINGTON — The Internal Revenue Service today announced its first successful prosecution related to fraud involving the first-time homebuyer credit and warned taxpayers to beware of this type of scheme.
On Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal20tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.
To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.
“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”
Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.
First-Time Homebuyer Credit
The First-Time Homebuyer Credit, originally passed in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a pr imary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before Dec. 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.
Different rules apply for homes bought in 2008.
Full details and instructions are available on the official IRS Web site,

Monday, July 13, 2009

Deductibility of Alimony

An issue that is frequently the subject of tax court litigation is the tax treatment of alimony payments. For alimony to be deductible it must truly be alimony - as opposed to child support or property division and, for purposes of I.R.C. § 71 and I.R.C. § 215, the support must terminate on ex-wife’s death.

Recent cases that focus on this issue include:

In Sperling v. Commisioner, T.C. Summary Opinion 2009-141 (June 16, 2009) the Court held that the former spouse’s payments for his ex-wife’s attorney’s fees and condominium fees were not deductible because his liability for the payments did not terminate upon her death. The parties’ settlement agreement failed to provide for termination of husband’s liability for the payments upon wife’s death. The mere fact that husband made the payments before entry of the final judgment and decree of divorce and prior to execution of the settlement agreement was not dispositive. The Court stated that the determining factor is the survival of husband’s liability for making payments after former spouse’s death, not when the payments are actually made.

The Court in Swening v. Commissioner, T.C. Summary Opinion 2009-7 (Jan. 8, 2009) held that ex-husband's unallocated support payments were not deductible because they lacked the essential terms required by §§71 and 215, and the state's divorce statutes did not supply the missing terms.

A recent tax court opinion notes that, in order to take the deduction, the obligated party must have actually paid the alimony. In Jonas v. Commissioner, T.C. Memo 2009-49 (March 5, 2009) the former spouse was ordered to pay support to his ex-wife. Despite not making those payments for two years, he did take deductions for alimony. The court upheld the disallowance of those by the IRS, ruling that ex-husband had not made a "payment" by virtue of the fact that his property, which had been subject to a lien to secure the alimony, was sold and the proceeds placed in a trust securing the alimony.

Finally, a California court addressed the issue arising when one party agrees to pay the other’s tax liability associated with the receipt of alimony payments. Specifically, when a settlement agreement, incorporated into a divorce decree, requires ex-husband to pay half of ex-wife's tax liability attributable to receipt of alimony, does ex-wife have a duty to select the filing status that will result in the lowest tax liability? The California Court of Appeals, holding that it would not imply such a requirement, ruled there was not an implied contractual duty of fair dealing in a settlement agreement incorporated into a final judgment and decree of divorce. Corona v. Corona, (California Court Appeals April 7, 2009)

Please count on Alternative Resolution Methods, Inc. as a resource for your valuation, mediation and litigation support needs. Marty is available for valuations, expert witness testimony and mediation. Sue is available for litigation support, trial preparation, and mediation. Our team is happy to assist you and your clients with forensic accounting. We look forward to working with you.

Tuesday, June 9, 2009

Alternate dispute resolution can save time and money

The construction industry is one in which disputes are unavoidable, with each side wanting an outcome that satisfies their position and their needs. Until recently the only method of resolving disputes was through litigation.In 1994, an advisory committee to the Ontario Attorney General recommended:

• that the construction industry, and construction lawyers, should become familiar with alternatives to the court process, including mediation and arbitration;

• that alternative methods of dispute resolution be included in construction contracts;

• that construction litigants should be required to participate in private mediation as early in the litigation process as practical.

Since the time, nothing much has changed with too many disputes still being directed to the traditional method of litigation. In Ontario the cost of litigating a construction claim with a value of $100,000 or less will almost always exceed the value of the claim. Often the time required to get the matter to trial and obtain resolution will exceed the time required to complete the project.

Increasingly people, including attorneys, recognize the adversarial approach of the traditional legal system does not effectively, efficiently or satisfactorily resolve some types of disputes. Many judges look favourably on private dispute resolution as it reduces their caseloads and provides a positive public image that the courts are willing to engage in more efficient methods of settling disputes. The courts can only focus on the legal issues brought forward with no consideration given to the particular interests of either party. As a consumer of legal services, it has become important for you to become well-informed as to alternatives to the litigation process. When it is not necessary to set a precedent, there is an alternative to the time consuming and costly method of litigation.

Construction projects are time sensitive and when a dispute arises a contractor could be faced with looking at several months or years of working through the court system before a settlement is reached or a judgment rendered. When time is of the essence, going the ADR route could achieve a settlement in no more than a few weeks.

The most common and expeditious alternative is the participation by all of the parties in a private dispute resolution process. By utilizing a private dispute resolution process, constructors are able to address contract and service provision disputes in a manner that minimizes costs and maintain confidentiality of business information. Utilizing the courts to settle a dispute often places a company at a disadvantage through the public disclosure of internal documents. Confidentiality does not exist in all court courts and documents, including bid / tender information, can and may be subject to public disclosure to anyone requesting access to the documents.

It is important to understand that professional dispute resolvers such as facilitators, mediators, and arbitrators do not advocate for or provide legal advice to the parties. Unlike judges who are trained in the law, but might not have any knowledge of your specific industry, professional dispute resolvers, generally bring some level of industry knowledge, and are trained to help seek resolution through a collaborative, non-adversarial process.

A simple way for you to determine if private dispute resolution should be applied to a particular dispute is to look at the dispute from the worst possible outcome – you are not successful at litigation and you are ordered to pay costs. Then work backwards through various less costly possibilities, including private dispute resolution processes and you will ultimately be able to focus on your interests and how they might best be met.

Dispute resolution is not a process of forcing a settlement, but is rather an undertaking by the parties in finding common interests and ultimately a resolution. It is nothing more complicated than a process of assisted negotiation between the parties in the dispute.

It is worth noting the comments of the renowned jurist, Justice Sandra Day O’Connor who stated: “The courts should be a last resort for the resolution of disputes, not the first.”

Christine Passnick has more than 30 years of experience in the areas of ICI, development, environmental and regulatory issues. She is the founder and principal of CEPASSOC.

Thursday, June 4, 2009

US Supreme Court Holds Age Discrimination Claims Can Be Forced Into Arbitration Under Collective Bargaining Agreements

In April 2009 the US Supreme Court upheld a provision of a collective bargaining agreement that “clearly and unmistakably” requires union members to arbitrate claims under the Age Discrimination in Employment Act. In 14 Penn Plaza LLC v Pyett, 186 LRRM 2065 (April 1, 2009), the Supreme Court held that since the parties had freely negotiated the terms of the collective bargaining agreement the arbitration provision must be honored. In cases where the collective bargaining agreement does not specifically require arbitration, filing of a lawsuit is still an option for disgruntled union member employees. This decision opens the door for litigants to compel arbitration of statutory claims under a collective bargaining agreement that unmistakably contains language waiving the right to a judicial forum. The state courts will have to determine what language is “unmistakable and clear” in waiving this right. Further, future negotiations of collective bargaining agreements that do not already contain this language will likely encompass discussions regarding the clear requirements to submit claims to arbitration.

Wednesday, April 29, 2009

Budget means a rise in litigation, says Hammonds

Apr 28 2009 by Tom Scotney, Birmingham Post

The bleak picture of the financial year ahead painted by the Budget will lead to a dramatic increase in litigation, lawyers from Hammonds have claimed.

The chancellor has said that the next financial year will be the worst in terms of economic performance since the Second World War. And as the financial pressure increases, businesses will want to recoup and prevent losses as quickly as possible, which in turn will lead to an increase in disputes.

But the firm said taking a matter to court is not always the best option for trying to resolve the dispute and continue a business relationship. Not only can litigation damage business relationships, but the outcome is never certain and it detracts key employee time and some of the business’ financial resources away from the focus of the business.

Amanda Beaton, from the dispute resolution department at Hammonds in Birmingham, said: “A skilled lawyer can greatly assist in reducing litigation costs by effectively managing the dispute and in doing this alternative dispute procedures must be considered.”

One of the alternative dispute resolution procedures commonly used by litigators is mediation.

Erica Simpson, also from the firm’s dispute resolution team, said: “This is a highly effective method of resolving disputes. It is a structured negotiation which is assisted by an independent third party and normally takes place over the course of a day. Clients are more comfortable with it than with more formal dispute resolution procedures as they have control over the process and are familiar with negotiation.”

And mediation can help salvage business relationships which would flounder if the dispute proceeded to trial. Ms Beaton said: “As it is a relatively quick process and does not need as much preparation as would be needed if a more formal method of dispute resolution were undertaken, it is cost effective which is in the interests of every client.”

Mediation is also being encouraged by the courts who can penalise parties if they have not considered other alternative dispute resolution methods. Ms Simpson added: “When businesses consider the benefits of mediation, it is easy to see why it is becoming more popular than ever and most businesses want to consider meditation to resolve the dispute.”

Tuesday, April 28, 2009

Breastfeeding Not A Defense to Joint Physical Custody Canadian Court rules if you can’t wean, get a machine…

Judge rules mom is milking her parental rights with breastfeeding defence


April 27, 2009


If you refuse to wean, then get a machine, an Ontario Superior Court judge has told a mother who used her breastfeeding schedule as a technique to deny access to her baby's father.

Jennifer Johne and Carl Cavannah met at a wedding on Aug. 27, 2005. Their brief affair resulted in a baby girl being born on June 16, 2006.

After the child was born, Mr. Cavannah quit his job teaching special-needs children and moved to Collingwood, Ont., to be closer to his daughter. He started making voluntary child-support payments, took parenting courses and pored over baby books.

However, Mr. Cavannah's intensive efforts to become a fully involved parent were thwarted, in part, by a rigorous breast-feeding schedule imposed by Ms. Johne.

"The child is now more than 29 months of age and is still being breastfed," Mr. Justice Alan Ingram wrote in an eight-page ruling.

"Jen believed strongly - through medical advice - in the merits of breastfeeding. However, the breastfeeding has a secondary impact upon Carl in that it is used as an excuse to restrict his access."

Judge Ingram quoted from an e-mail that Ms. Johne, a 35-year-old artist, sent to Mr. Cavannah shortly after the baby was born.

"A baby belongs with its mother, and if you had an understanding of the needs of a fully breast-fed baby and truly had [her] interests at heart, you would not be bringing this subject up again," she stated in the e-mail.

Given her intransigence, Judge Ingram said that Mr. Cavannah, 42, had been remarkably patient.

"Jen has been unwilling to give a timetable as to when the breastfeeding will end," Judge Ingram said. "But now, the time has come for Jen to have greater consideration for the relationship between the child and Carl. If she used a breast pump and provided the milk to Carl, he would be willing to give it to [the child]."

The judge also praised the child's parents. "She has two parents who have made her the centre of their lives, unusual in that this was an unplanned pregnancy between two parents who had a brief relationship and had not committed to having children," he said.

Under the Children's Law Reform Act, a mother and father are equally entitled to custody of a child. When an access dispute breaks out, judges use a list of criteria to determine whether or not to depart from an equal-access regime.

Judge Ingram ruled that Ms. Johne and Mr. Cavannah's child would be best served by a 50/50 access arrangement.

"As soon as Jen realizes that she is one of two equal parents and the parties find a form of communication, they should be able to get on with their common goal of facilitating and encouraging [the child] to reach her full potential," he said.

Phil Epstein, a family lawyer expert, described the ruling as "one which will be of comfort to involved fathers who wish to be equal parents."

Mr. Cavannah declined to discuss the case, and Ms. Johne could not be reached for comment.

However, Ms. Johne's lawyer, Carol Allen, noted in an interview that it is very difficult to argue in favour of a continuation of breast-feeding after a child is two years old since pumping is a viable alternative.

Ms. Allen said that her client may soon be returning to court because she is dissatisfied with Judge Ingram's solution to the access issue.

"The schedule allowed the father to work four days a week, and then have the child from Thursday to Sunday or Monday night," Ms. Allen said. "That leaves the mom with no weekend time. It is probably going to have to be revisited. It's unfortunate."

Ms. Johne lives in a small town about 20 minutes from Collingwood, where she helps her mother operate a small daycare.

Thursday, April 16, 2009

Underwater Stock Options, A Problematic Marital Asset

In today’s economy a new issue has arisen regarding stock options that once upon a time had value as a marital asset. With the economic downturn, a majority of stock options are now underwater. Approximately, two thirds of public companies report their stock options underwater. How should we treat this asset in a divorce settlement?

Companies that issue stock options have to report the outstanding options as an expense on their books, driving meager earnings down. As a result, new policies are being introduced by several companies where they are re-pricing the stock options or recalling the options and reissuing them at a lower price. This may result in a new vesting schedule. This issue may also arise when a spouse loses a job, is lucky enough to find a new job and receives stock options from his subsequent employer to compensate him/her for marital options left on the table during the job change. It is necessary to anticipate this issue and address the manner of treating and dividing recalled or re-priced options when negotiating a property settlement.

It is important to include in the settlement agreement appropriate language to preserve capital gains treatment for the ultimate exercise and sale of qualified stock options. The spouse in whose name the stock options are titled (Husband) would need to hold onto the options on behalf of the other spouse (Wife), and upon the ultimate sale of her share of the options, Husband would pay to Wife her net share of the option proceeds after taking into account taxes. Possible language to include in the settlement agreement follows.

“It is understood that the Husband shall hold said options on behalf of the Wife. Husband shall not unreasonably withhold Wife’s request to sell her share of the options. Wife recognizes Husband’s fiduciary relationship to the corporation, and Husband will not be required to impair that relationship by exercising the options. Wife acknowledges that upon exercise of the options there will be a tax consequence to Husband, and she will be entitled to receive only the net after tax proceeds from the exercise of the option (net defined as Husband’s net). Husband shall have an affirmative duty to advise Wife of the vesting of the options, as well as the expiration date of the options.”

Monday, March 30, 2009

Transfer of Property Incident to Divorce: Tax Benefit

Many of us have worked on cases where the ultimate property settlement was hampered due to lack of liquidity. This often occurs in families where the most significant asset is either a closely held business or real estate.

Often one of the parties requests that the ultimate disposition of these non-liquid assets be finalized some time in the future when the closely held business or real estate interest is sold. He or she further posits that the real value of these assets will only be known with certainty at the time of sale.

Although this is a strong argument, this is often described as a “RFD” (recipe for disaster). There is a significant tax reason not to delay the property settlement until the ultimate sale.

The Internal Revenue Code states that “no gain or loss is recognized to the transferor on a transfer of property between spouses or between former spouses incident to a divorce, nor is the value of the property included in the gross income of the transferee”.

A property transfer is deemed to be incident to a divorce if
* The transfer occurs within one year after the date the marriage ends, OR
* The transfer is related to the ending of the marriage

A property transfer is related to the ending of the marriage if
* The transfer is made under the original or modified divorce or separation instrument, AND
* The transfer occurs within six years after the date the marriage ends.

This tax free transfer of property between divorcing parties is a tremendous tax benefit. If the ultimate transfer does not occur under these rules, the tax consequences could be devastating. For example, let’s assume 50% of the proceeds from the sale of a closely held business are transferred to a former spouse outside the requisite time period. Let’s further assume the company originally cost $100,000 and is valued at $400,000 at the time of the transfer. Tax will be owed on 50% of the $300,000 gain ($400,000 less $100,000) by the transferor. Even if the tax is incurred at capital gains tax rates, the tax is unnecessary.

Friday, March 27, 2009

The Domino Effect of The Current Economic Crisis

The deepening recession, increased unemployment, and a stalled housing market have negatively impacted most of our clients’ financial situations. Many clients’ homes are underwater because of declining values. Other divorcing couples who are fortunate enough to have equity in their most significant marital asset, their home, can not sell their house. Combine that with the plummeting values of retirement accounts, and we are looking at marital asset balance sheets that are nothing less than bleak.

Although, historically, divorce rates tend to rise during a bad economy, divorce practitioners nationwide have noticed a change in their practices. Experts attribute the decline in divorce filings to the severity of the economic downturn. Typically, a recession results in decreased divorce rates for couples with limited financial resources. The prospect of incurring expenses for two households seems overwhelming for those with limited resources. On the other hand, high net-worth clients may seek to take advantage of the diminished value of their homes, stock and investment portfolios, and businesses to decrease their overall financial liability to their soon-to-be ex-spouse.

When the marital residence or small business is the most significant marital asset, the party who is able to retain the house or business may reap a significant benefit down the road, rather than the one who is compensated by cash or other assets, because the value of the house or business is likely to increase once the economy recovers.

The credit crisis has impacted us, as practitioners, as well. How many times have you heard from a client that their credit card is maxed out and he/she can not replenish their retainer? Discovery has been completed but there is no more money to fund the litigation. Where does that leave us?

Instead of thinking of ways to get out of the case, perhaps we should begin to think of alternative ways to resolve the case in a more cost-effective manner. We are all familiar with mediation and late case evaluation. Arbitration is another alternative when impasse has positioned the parties and created a standstill. A three person arbitration panel, comprised of a family law expert, a financial expert and a mental health professional, may provide an insightful resolution that is far more productive than going to court. Bringing additional professionals into the picture may bring difficult issues into focus.

If the main problems are financial in nature, involving marital asset division or support alternatives, introducing a financial neutral to work with the parties may move things in the right direction. One thing many of us have not considered is the value that a financial neutral would contribute to helping the case settle in mediation. The presence of the financial expert at the mediation, working in conjunction with the mediator, would provide answers to many of the financial issues that impede the settlement process. Issues such as the tax savings associated with different support options, the variations in pension values caused by using different interest rate assumptions, and the after tax versus before tax values of various assets could be resolved right on the spot. When the primary sticking points center on custody issues, the assistance of a parent coordinator or child specialist could prove invaluable.

Today’s economy requires us, as legal professionals, to assemble a team that will serve our clients in a cost-effective manner. Although we all know that some cases are destined to go to litigation, we should attempt to utilize alternative methods of resolution prior to taking this final leap. Mediation, arbitration and a form of the collaborative law model are just a few possibilities. We are fortunate to live in a community replete with knowledgeable and experienced experts who can provide our clients with wonderful resources. It is up to us to inform our clients of the availability of those options.

Sue K. Varon, Esq. and Martin S. Varon, CPA, CVA, JD

Tuesday, March 24, 2009

Obama’s Stimulus Plan Benefits Small Business Owners

Several benefits in the Stimulus Plan benefit small business owners. However, some of the tax relief expires in 2009 or 2010 so it is important to speak to a certified public accountant to fully take full advantage of any benefits of the legislation.

IRS section 179 generally requires businesses to depreciate equipment purchases over the life of the property. In an effort to encourage small businesses to purchase equipment, the new stimulus package now generally allows a business to immediately write off the cost of equipment, up to $250,000 (an increase from $125,000) in the year of purchase. Further, the incentives (which include grants and loans to local governments and nonprofit groups) set out to expand broadband internet access to underserved areas, may allow more people to work from home.

Small businesses with gross revenue of up to $15 million will be able to carry back net operating losses (which occur when the business deductions exceed the income for the year) for up to five years. This is an increase from the previous rule of two tax years.

A business with adjusted gross income in 2008 of up to $150,000 can avoid underestimated tax penalties in 2009 by making timely estimated tax payments based on 100% of the 2008 tax liability. If the business adjusted gross income exceeds $150,000, penalties may be avoided by making estimated payments on 110% of the 2008 tax liability.

For 2009 and 2010, the new making work pay credit is 6.2 percent (which is the equivalent of the rate of social security tax) of a taxpayer’s earned income or $400 ($800 for married filing jointly), whichever is less. As a result a taxpayer receives a credit equal to Social Security withholding. There is a phase out on this credit as a person’s modified adjusted gross income increases from $150,000 to $190,000 on a joint return ($75,000 to $95,000 on an individual return). Note, the credit is unavailable if the taxpayer qualifies as someone’s dependent or is a nonresident alien. Although this credit was not previously available to small businesses, the stimulus package allows small business owners to take advantage of this credit as well.

These are merely some of the benefits available to small businesses under the new stimulus package. It is important to meet with a certified public accountant to learn all the specifics and limitation of these as well as other benefits provided in the stimulus package.

Note: The information contained in this article represents a brief summary of specific potential tax benefits and should not be relied upon without seeking the advice of an independent professional as to how any of these provisions may apply to a specific situation.

Martin S. Varon, CPA, CVA, CEBS, JD
Sue K. Varon, Esq.

Monday, March 23, 2009

Post-Divorce Planning: Tips for the Divorce Attorney and The Client

Negotiating a final settlement in a divorce is usually a very stressful time for all parties: the husband, the wife, the children, and both attorneys. Despite the tension and delicacy of the issues, it is important not to lose sight of something very important. It is critical to start thinking of the future for the ex-husband, ex-wife, and the children.

Income Taxes

It is very important to start considering the tax consequences to all parties immediately. Tax filing statuses, brackets and exemptions have changed, and it is imperative to consider the effect on all taxpayers. The divorced couple has gone from a Married Filing Joint or Separate (MFJ or MFS) status to either a Single or Head of Household status and the applicable tax tables have changed significantly. The payor of alimony is entitled to a new above the adjusted gross income line deduction and this may lead to an adjustment of his/her withholding requirements. Or, if the payer is self employed, the alimony deduction may decrease the size of his/her estimated payments.

The recipient of alimony is now receiving income where there is no tax being withheld. It is probably necessary for that party to start making quarterly estimated tax payments.


It is very important to make sure that the parties have the proper type and amount of insurance in place. After the divorce, is your client covered under a health insurance policy? If not is COBRA available, or is it time for your client to be added to coverage at his/her place of employment? If that option is not available, is it time for your client to obtain an individual policy? The types of policies and coverage vary significantly so your client should review this with someone experienced in the insurance industry.

Is disability insurance needed or warranted?

Is your client’s automobile still insured? Is it time to review this policy?

Is your client’s home and personal belongings properly and adequately covered? It is advisable for your client to meet with both his/her personal and property and casualty insurance advisors.


After the divorce, your client needs to update his/her will. Not only do changes have to be made regarding the distributions to heirs, it is critical to consider the issue of who should be the guardian of the children should the parties die prematurely.

Beneficiary Designations

It is necessary to update the beneficiary designations under any retirement plans and life insurance policies as soon as possible.

Meetings As Soon As Possible

It would be advisable for your client to meet with the following people :

  • Family Attorney
  • CPA
  • Insurance Broker
  • Head of Human Resources at the company where your client works

Wednesday, March 11, 2009

Claiming the Child Dependency Exemption

With tax season in our midst, the question of claiming the child dependency exemption is consistently posed by our clients. Here is a recent development that you should keep in mind. As you may know, the non-custodial parent can claim the child dependency exemption, as long as the custodial parent signs a waiver promising not to claim the exemption. This is typically accomplished by the use of IRS Form 8332 (which was revised in January 2009.) Recent amendments to IRS regulations provide that a release not on a Form 8332 must be a document executed for the sole purpose of releasing the claim. A court order or decree or a separation agreement cannot serve as the written declaration. The noncustodial parent can no longer attach certain pages from a divorce decree or separation agreement instead of Form 8332 if the decree or agreement was executed after 2008. If the decree or separation agreement was executed before 2009, the noncustodial parent can continue to attach certain pages from the decree or agreement.

If the release of the child dependency claim is for more than one year, the noncustodial parent must attach a copy of the written declaration to the parent’s return for the first tax year for which the release is effective, as well as to returns for later years. Further, the custodial parent who released the right to claim a child, can revoke the release for future tax years by providing written notice of the revocation to the other parent. The revocation can be made on Form 8332, or other form provided by the IRS. A revocation not on the designated form, must conform in substance to the form, and must be in a document executed for the sole purpose of revoking the release. A taxpayer revoking a release may attach a copy rather than an original to the taxpayer’s return for the first tax year the revocation is effective, as well as for later years.
If a non-custodial parent claims the child exemption first, and without the custodial parent’s permission, he or she is likely to receive the exemption temporarily. However, once the custodial parent files his or her tax return including the exemption, and IRS notices that a child’s social security number has been included on two different tax returns, then both parties would be notified by IRS that only one party is entitled to the exemption, and the tie-breaker rule would be used to resolve this situation. This rule says that if two parents claim that a child as a dependent, the parent with whom that the child lived with the longest during the year, receives the exemption. If the child had spent the same amount of time with both parents, then the parent that had the higher adjusted gross income would get the exemption. The parent who was not entitled to the exemption would have to repay the tax, plus penalties and interest.

Tuesday, March 10, 2009

Clients Suddenly Single in 2009

Clients who divorced in 2008 will have to deal with several tax matters affecting them in 2009. A change in marital status will likely result in a change in exemptions, adjustments, deductions, or credits an employed individual will claim on his or her tax return. It will be necessary for your client to provide his/her employer with a new Form W-4 to change withholding status or number of allowances. If the divorce changes withholding status or the number of allowances claimed, the employer should be provided with a new Form W-4 within 10 days after the divorce, if your client has been claiming married status. Generally, a new Form W-4 can be submitted at any time to change the number of withholding allowances for any other reason.

If your client is the recipient of alimony payments, it is important for her/him to estimate the taxes she/he will have to pay with an increase in her/his income. This should be done sooner, rather than later, in order to avoid penalties or deficits in tax payments.

If your client made joint estimated tax payments for 2008, and he/she was divorced during the year, either your client or his/her former spouse can claim all of the joint payments, or each can claim part of them. If they cannot agree on how to divide the payments, they must divide them in proportion to each ex-spouse's individual tax as shown on their separate returns for 2008. If your client claims any of the joint payments on his/her tax return, they should enter their former spouse's social security number (SSN) in the space provided on the front of Form 1040 or Form 1040A.

Record-keeping is one of the most important steps in tax planning for a client whose tax records suddenly have been split in two. It is important to keep tax records for three years after filing tax returns. Your client needs to have copies of all records, or errors will occur in filing their taxes in the year following the divorce that could raise red flags with the IRS. Your client should maintain accurate records of all W-2s, 1099s, mutual fund statements, brokerage fund statements and other investment information. Too often problems arise when suddenly single people realize the former spouse has the paperwork when the time has come to file taxes. Requiring copies of all receipts and records would be a good thing to iron out during the divorce negotiations.

When filing separately for the first time, your client will be faced with other issues. Joint custody of the children requires a decision on which parent claims which child in terms of dependents. Your client needs to know who is claiming which child, or another red flag could go up at the IRS.

The best advice you can give to your recently divorced client is to seek the advice of their financial professional shortly after the divorce.

Marty Varon, CPA, CVA, JD; Sue Varon, Esq.

Alternative Resolution Methods, Inc.;