divorce & estates: tax and other financial considerations
TRANSCRIPT
Divorce & Estates: Tax And Other Financial
Considerations
Presented by
Rick Lahr, CPA
I. Divorce
A. Three Major Causes of Divorce
1. People do not want to work at marriage
2. People do not know how to talk to each other and they know even less about listening
3. Marital expectations rarely align with the realities of what life is like inside a marriage
I. Divorce
B. Property Settlements1. Generally no gain or loss is
recognized on a transfer of property incident to divorce
2. Federal gift tax does not apply to most transfers of property between spouses
3. If sale of jointly-owned property report recognized gain or loss on income tax return for the year of sale
4. Special rules apply to separated and divorced individuals selling a main home
I. Divorce
C. Costs of Getting A Divorce1. Cannot deduct legal fees and
court costs2. May be able to deduct
a. Legal fees paid for tax advice and to get alimony
b. Fees paid to accountants, actuaries, and appraisers for services in determining tax or in helping to get alimony
I. Divorce
D. Alimony1. Before September 1, 2011
a. In 1995 Texas became the last in the union to adopt any form of alimony
b. Called “spousal maintenance” it was among the most restrictive in the nation and was rarely used
I. Divorce
D. Alimony2. After August 31, 2011
a. Maximum amount of “spousal maintenance” was increased from $2,500 to $5,000 a month, or 20 percent of gross earnings (whichever is less)
b. “Minimum reasonable needs” determined on a case-by-case basis
c. The length of the marriage can determine the duration of support
I. Divorce
D. Alimony3. Alimony is deductible by the
payer and the recipient must include it in income if:
a. The payment is in cashb. The divorce or separation
instrument does not designate the payment as not alimony
c. The spouses are not members of the same household at the time the payments are made
I. Divorce
D. Alimony (continued)3. Alimony is deductible by the
payer and the recipient must include it in income if:
d. There is no liability to make any payment (in cash or property) after the death of the recipient spouse
e. The payment is not treated as child support
I. Divorce
D. Alimony4. Recapture of alimony
a. If alimony payments decrease or end during the first 3 calendar years
b. Change in divorce or separation instrument
c. Failure to make timely payments
d. Reduction in ability to provide support
e. Reduction in support needs
I. Divorce
E. Filing Status1. Married filing jointly
a. Joint and several liabilityb. Innocent spouse reliefc. Separation of liabilityd. Equitable reliefe. Injured spouse refund of
overpayment
I. Divorce
E. Filing Status2. Married filing separately
a. Responsible only for the tax due on return filed
b. Separate returns, in almost all instances, result in a larger combined tax because special rules apply
I. Divorce
E. Filing Status3. Head of household
a. Unmarried or “considered unmarried” on the last day of the year
b. Paid more than half the cost of keeping up a home for the year
c. “Qualifying person” lived with you in the home for more than half the year
I. Divorce
F. Exemptions For Dependents 1. Qualifying child2. Qualifying relative3. Dependent cannot claim
exemption on their own tax return4. Written declaration (on Form
8832 or similar statement) to release exemption (or revoke release of claim to exemption) included with tax return of parent claiming the exemption
I. Divorce
G. Publication 504 - Divorced Or Separated Individuals
H. Publication 555 - Community Property
II. Estates
A. Personal Representative1. Executor, administrator, or
anyone who is in charge of the decedent’s property
II. Estates
A. Personal Representative2. Duties
a. Collect all assetsb. Pay all creditorsc. Distribute remaining assets to the
heirs or other beneficiariesd. Apply for an employer
identification numbere. File all (estate, gift and income)
tax returns when duef. Pay the tax determined up to the
date of discharge from duties
II. Estates
A. Personal Representative3. Fees
a. If in the trade or business, report on Schedule C
b. If not in the trade or business, report on Form 1040 Line 21
II. Estates
B. Final Income Tax Return For Decedent
1. Taxable period ends on the date of death
2. Surviving spouse can file a joint return for the year of death
3. Qualifying widows and widowers may be eligible to use married filing jointly tax rates
II. Estates
C. Income In Respect Of A Decedent
1. Examplesa. Deferred and uncollected
compensationb. Retirement plansc. Accrued dividends, interest,
rents, and royaltiesd. Uncollected proceeds from gain
from the sale of property deemed to occur before death
II. Estates
C. Income In Respect Of A Decedent
2. Included in the income of:a. Decedent’s estate, if the estate
receives itb. Beneficiary, if the right to
income is passed directly and the beneficiary receives it
c. Person to whom the estate properly distributes the right to receive it
II. Estates
D. Income Tax Return Of An Estate
1. Calendar or fiscal year election considerations
a. Defer incomeb. Manage tax ratesc. Manage tax payments (if
administration may take longer than 12 months)
d. Minimize number of returns required to be filed
II. EstatesD. Income Tax Return Of An
Estate2. Income to include:
a. Filing requirement if gross income is $600 or more
b. All items received or accrued during the tax year
c. Character of asset generally same as if in the hands of the decedent
d. Holding period considered to be for more than 1 year
e. Basis of property usually is fair market value at date of death
II. Estates
D. Income Tax Return Of An Estate
3. Exemption and deductionsa. Allowed exemption deduction
of $600 in figuring taxable income
b. Charitable contributionsc. Administration expensesd. Income distribution deduction
II. Estates
E. Estate and Gift Taxes1. In 2015, the credit on the
basic exclusion amount is $2,117,800 (exempting $5,430,000 from tax)
2. 2013 – 2016 gift tax annual exclusion is $14,000
F. Publication 559 – Survivors, Executors, and Administrators
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