Unit 12 Flashcards

1
Q

Valid Prenuptial Agreement: 4 Requirements

A
  1. Written & Signed: Agreement must be in writing and signed by both parties.
  2. Full Financial Disclosure: Complete and accurate disclosure of each party’s net worth, with no intent to hide assets.
  3. No Promotion of Divorce: The agreement cannot be designed to encourage or incentivize divorce.
  4. Freely & Voluntarily Executed: Both parties must enter into the agreement willingly, without any form of duress, coercion, or undue pressure.
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2
Q

What is the default filing status for married couples?

A

Married Filing Separate

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3
Q

If you’re married on 12/31 the IRS considers your married for?

A

The entire year

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4
Q

What is required in order to married file jointly?

A

A joint election by 2 consenting signatures

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5
Q

If you don’t want to be jointly and severally liable what would you do with your spouse?

A

Married filing separate

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6
Q

A surviving spouse, also referred to in the code as a qualifying widow or widower, may file as MFJ for the tax year in which the spouse has died, provided what

A

provided the surviving spouse has not remarried

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7
Q

If your spouse has died and you are filing as a surviving spouse, how long do you get the personal exemption for the deceased spouse?

A

First year only

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8
Q

Filing as surviving spouse

A

Conditions:
U.S. Citizen/Resident: Must be a U.S. citizen or resident.

Joint Return Eligibility: Qualified to file a joint return in the year of spouse’s death.

Dependent Child at Home: At least one dependent child living in the home.

Household Expenses: Paid over half of the household’s expenses.

Unmarried: Not remarried as of the year-end for which the surviving spouse status is claimed.

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9
Q

Dependents on a Married Couple’s Return

A

Who Qualifies: Children and other individuals meeting IRS dependency tests.

Personal Exemptions: Each dependent, along with the parents, qualifies for a personal exemption (under regular tax calculation methods).

Divorce Issue: Determining which parent can claim the dependency exemption after divorce is a key consideration.

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10
Q

Who is the owner of common law non-community property?

A

the person or persons whose names appear on the deed

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11
Q

Jointly held property when one spouse dies

A

First spouse to die: Half of the property’s Fair Market Value (FMV) is included in their gross estate (passing by law).

Surviving spouse: Receives a step-up in basis for the half included in the deceased spouse’s estate.

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12
Q

Community Property

A

Definition: In CP states, property acquired after marriage is owned equally (50/50) by both spouses, regardless of whose name is on the deed.

Exceptions: Only assets acquired with separate, traceable funds maintain separate ownership.

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13
Q

Community Property Tax & Estate Implications

A

Divorce: Ownership impacts property division.

Estate Planning

Surviving Spouse: Receives a full step-up in basis for the entire Fair Market Value (FMV) of the property, even though only half is included in the deceased spouse’s gross estate.

Probate: CP assets pass through probate, while jointly owned property in common law states may not.

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14
Q

Community Property States Mnemonic

A

“I WANT LAWN C”
Idaho
Wisconsin
Arizona
Nevada
Texas
Louisiana
Alaska (requires spousal election)
Washington
New Mexico
California

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15
Q

Alimony Divorces After December 31, 2018 (TCJA Rules Apply)

A

Recipient Spouse: Alimony is NOT taxable income.
Payor Spouse: Alimony payments are NOT tax-deductible.

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16
Q

Alimony Divorces Before January 1, 2019 (Pre-TCJA Rules Apply)

A

Recipient Spouse: Alimony is taxable income.

Payor Spouse: Alimony payments are tax-deductible.

17
Q

Valid Alimony (Separation Agreement Payments): 5 Requirements

A

Cash Payments: Alimony must be paid in cash (checks, money orders, etc.).

Separate Residences: Spouses must live in separate households and file separate tax returns.

Tax Code Compliance: Divorce decrees cannot designate alimony as non-reportable by the recipient or non-deductible by the payor (no undermining tax rules).

Termination Upon Death: Alimony payments must cease upon the recipient’s death (no payments to their estate).

Not Child Support: Payments cannot be disguised child support.

18
Q

Is child support a tax issue?

A

No. It is not deductible for the payer and it is not reportable for the payee.

19
Q

Dependency Exemption (Post-Divorce):

A

Default Rule: The parent with the longer period of custody during the year typically claims the exemption.

Agreement Override: Parents can agree to give the exemption to the non-custodial parent.

IRS Form Required: This requires a specific IRS form, signed annually by both parents, and filed with the tax return.

Caution: Simply mentioning this agreement in the divorce decree without the proper IRS form is insufficient for the IRS.

20
Q

Property Division in Divorce

A

Not a Taxable Event: Transferring property between spouses during divorce is not a taxable event.

Basis Carryover: The spouse receiving the property assumes the transferring spouse’s original basis in the property.

21
Q

Tax Credits vs. Deductions

A

Tax Credits: Directly reduce your tax liability dollar-for-dollar.
Deductions: Reduce your taxable income, which indirectly lowers your tax liability.

22
Q

Credit vs Deduction Example 24% Tax Bracket

A

$1,000 Tax Credit: Reduces tax liability by $1,000.

$1,000 Deduction: Reduces taxable income by $1,000, leading to a tax liability reduction of only $240 ($1,000 x 24%).

23
Q

Deferral of Income

A

Time Value of Money Advantage: Deferring income to a later year can save you money due to the time value of money (your money has more time to grow tax-deferred).

Accounting Method: Most effective for taxpayers using the cash method of accounting.

Prime Example: Contributing to a qualified retirement plan (defined contribution plan).

Key Benefit: Contributions and earnings within qualified plans are tax-deferred until withdrawn (not subject to regular tax or AMT).

24
Q

Deferral of income Time Value of Money Advantage

A

Time Value of Money Advantage: Deferring income to a later year can save you money due to the time value of money (your money has more time to grow tax-deferred).

25
Q

Deferral of income Accounting Method

A

Accounting Method: Most effective for taxpayers using the cash method of accounting.

26
Q

What is a good example of deferral of income?

A

Contributing to a qualified retirement plan (defined contribution plan).

27
Q

Key benefit of deferral of income?

A

Contributions and earnings within qualified plans are tax-deferred until withdrawn (not subject to regular tax or AMT).

28
Q

Intra family transfers common examples

A

Employing family members
Sale and gift-leasebacks
Family limited partnerships (FLPs)
Installment sales and self-canceling installment notes (SCINs)
Private annuities

29
Q

Intra family transfer

A

Primary Purpose: Wealth transfer and estate planning.

Tax Benefits Reduced Since 1986: Lower marginal tax rates and compressed brackets have lessened the income tax advantages.

30
Q

Employing Family Members in a Business
Benefits

A

Lower Tax Rates: Children often have lower tax brackets than parents, leading to tax savings.