Module 4: Tax Implications of Special Circumstances

Question 1

Legally Married Spouses May File a Joint Return IF

Answer 1

• their tax years begin on the same date
• they are not legally separated under a decree of divorce or separate maintenance on the last day of the calendar year; and
• neither is a nonresident alient at any time during the year.

Question 2

Joint and Several Liability

Answer 2

Each spouse is responsible for the entire tax liability and not just half of the tax liability due. Even if one spouse cannot be located

Question 3

Test Tip: Married Filing Separately for Divorce

Answer 3

• If one spouse takes itemized deductions, the other must take itemized deductions. Same with standard deductions as well.

Question 4

Spousal Relief

Answer 4

• Excuses one spouse for the failure of the other spouse’s tax obligation if certain conditions are met.

Question 5

Types of Spousal Relief

Answer 5

• Innocent Spouse Relief
• Relief by Separation of Liability
• Equitable Relief
• Injured Spouse

Question 6

Innocent Spouse Relief

Answer 6

• an Individual can be relieved of responsibility for paying tax, interest, and penalties if their current or former spouse improperly reported or omitted items from the joint tax return.

Question 7

innocent spouse relief conditions to qualify

Answer 7

• an indiviual filed a joint return that has an understatement of tax due because of erroneous items
• the individual can establish that, at the time the joint return was signed, the individual did not know about hte understatement of the tax
• after taking into account all the facts and circumstances, it would be unfair to hold the individual liable for understatement of tax

Question 8

Relief by Separation of Liability Conditions

Answer 8

• Individual must have filed a joint return
• must meet one of the two requirements:
  1. the individual is no longer married (or is separated from) the spouse with whom the return was files
  2. The individual was not a member of the same household as the spouse with whom the joint return was filed

Question 9

Equitable Relief Conditions

Answer 9

• The individual does not qualify for innocent spouse relief or relief by separation of liability
  0 the individual and the spouse or former spouse did not transfer assets to each other as a part of a fraudulent conveyance
• The individual did not file the return with the intent to commit fraud
• after taking into account all the facts and circumstances, it would be unfair to hold the individual liable for the understatement of tax
• the income tax liability from which the individual seeks relief must generally be attributable to an item of the spouse with whom the individual filed the joint return

Question 10

Injured Spouse

Answer 10

Filed when the refund on the jointly filed return has been frozen or seized to satisfy some past-due obligations.

Question 11

Purpose of a Pre-marital agreement

Answer 11

• to limit the presumed effect of the marriage on property acquired before or during the marriage.

Question 12

Premarital inforcement

Answer 12

1. must be signed in writing by both parties
2. both parties must include full and complete disclosure of their net worth
3. Premarital agreements must not be intended to facilitate or promote the procurement of a divorce
4. Must be shown that the agreement was executed willingly by both parties without duress or coercion.

Question 13

What determines a dependent?

Answer 13

• May not have more than 4300 of gross income, and SS income is excluded from the test if it’s their only source of income
• Taxpayer must provide over 50% of the dependent’s support to claim them

Question 14

Three common tax benefits of taking care of an elderly parent

Answer 14

• The client may claim their elderly parent as a qualifying relative on their tax return and receive a 500 credit.
• If the Qualifying relative is incapable of self-care, the child and dependent care credit of 600 may also be claimed
• Assuming the elderly parent is an eligible dependent, any medical expenses paid on their behalf can be taken as an itemized deduction subject to AGI thresholds
• client may receive wages from a qualified medicaid facility, in special cases, if they have to provide full time care to a parent in their own home, and this is exclued from taxable income.

Question 15

Divorce Property Settlements

Answer 15

Any transfer of property between spouses incident to a divorce is tax free. The basis is also transferred over.

Question 16

Divorce Trust Settlements

Answer 16

If a former spouse is the beneficiary of an irrevocable trust they may be asked to disclaim their interest in the trust but this may create unintended gift tax consequences to the other beneficiaries

Question 17

Divorce Payments

Answer 17

• it is generally better for the payor to spread the amount of payments over as many years as possible to take advantage of the time value of money.

Question 18

Splitting of Retirement Assets

Answer 18

• In a community property state, half of a participating employee’s interest, when it is accrued under a retirement plan during marriage, belongs to the spouse. It is considered marital property to be shared with the other spouse.

Question 19

Qualified Domestic Relations Orders

Answer 19

Should be used to divide qualified retirement plan assets among spouses at the time of divorce. If a QDRO is valid and approved by the court, retirement plan assets may be transferred from one spouse to the other spouse without any immediate income tax consequences.

Question 20

Alimony and Separate Maintenance Payments

Answer 20

• deductible for AGI for the payor and are includable in the gross income of the payee.
• The payment must be made in cash, and must be given to the spouse before the spouse uses it to pay anything else
• The agreement or decree does not specify that the payments are not alimony for fed income tax purposes
• the payee and payor are not members of the same household at the time the payments are made
• there is no liability to make the payment for any period after the death of the payee
• payments are made directly to the payee spouse or to a third party for direct benefit of the payee spouse.

Question 21

Payments to Third Parties

Answer 21

• cash payment of the payee spouse’s mortgage, rent, tuition, or tax liability made by the payor spouse as required by the divorce of separation instrument may qualify as alimony.
• the payments must be to property that isn’t owned by the payor.

Question 22

Front-Loading Rules

Answer 22

• also known as alimony recapture rules
• it affects the third year of alimony payments only
• paying too much up front instead of evenly spacing out payment will result in recapture for tax purposes.
• If alimony payments in the first year exceed average payments in the second and third years by more than 15k, the excess amounts are recaptured in the third year (because they were typically deductible)

Question 23

Shortcut for calculating third-year recapture

Answer 23

Recapture = (first year pmt + second year pmt) - 2(third year pmt) - 37,500

Question 24

Child Support Payments Taxability

Answer 24

nontaxable to the payee and non deductible by the payor.

Question 25

Child Support vs. Alimony

Answer 25

If the payment is tied to a contingency related to the child, then the amount of this payment is presumed to be child support, with the remained constituting alimony.