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.
Monday, March 30, 2009
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.
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
mvaron@armvaluations.com
and
Sue K. Varon, Esq.
svaron@armvaluations.com
www.armvaluations.com
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
mvaron@armvaluations.com
and
Sue K. Varon, Esq.
svaron@armvaluations.com
www.armvaluations.com
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.
Insurance
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.
Wills
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.
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.
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