Unit 12 Flashcards
Valid Prenuptial Agreement: 4 Requirements
- Written & Signed: Agreement must be in writing and signed by both parties.
- Full Financial Disclosure: Complete and accurate disclosure of each party’s net worth, with no intent to hide assets.
- No Promotion of Divorce: The agreement cannot be designed to encourage or incentivize divorce.
- Freely & Voluntarily Executed: Both parties must enter into the agreement willingly, without any form of duress, coercion, or undue pressure.
What is the default filing status for married couples?
Married Filing Separate
If you’re married on 12/31 the IRS considers your married for?
The entire year
What is required in order to married file jointly?
A joint election by 2 consenting signatures
If you don’t want to be jointly and severally liable what would you do with your spouse?
Married filing separate
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
provided the surviving spouse has not remarried
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?
First year only
Filing as surviving spouse
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.
Dependents on a Married Couple’s Return
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.
Who is the owner of common law non-community property?
the person or persons whose names appear on the deed
Jointly held property when one spouse dies
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.
Community Property
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.
Community Property Tax & Estate Implications
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.
Community Property States Mnemonic
“I WANT LAWN C”
Idaho
Wisconsin
Arizona
Nevada
Texas
Louisiana
Alaska (requires spousal election)
Washington
New Mexico
California
Alimony Divorces After December 31, 2018 (TCJA Rules Apply)
Recipient Spouse: Alimony is NOT taxable income.
Payor Spouse: Alimony payments are NOT tax-deductible.
Alimony Divorces Before January 1, 2019 (Pre-TCJA Rules Apply)
Recipient Spouse: Alimony is taxable income.
Payor Spouse: Alimony payments are tax-deductible.
Valid Alimony (Separation Agreement Payments): 5 Requirements
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.
Is child support a tax issue?
No. It is not deductible for the payer and it is not reportable for the payee.
Dependency Exemption (Post-Divorce):
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.
Property Division in Divorce
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.
Tax Credits vs. Deductions
Tax Credits: Directly reduce your tax liability dollar-for-dollar.
Deductions: Reduce your taxable income, which indirectly lowers your tax liability.
Credit vs Deduction Example 24% Tax Bracket
$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%).
Deferral of Income
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).
Deferral of income Time Value of Money Advantage
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).
Deferral of income Accounting Method
Accounting Method: Most effective for taxpayers using the cash method of accounting.
What is a good example of deferral of income?
Contributing to a qualified retirement plan (defined contribution plan).
Key benefit of deferral of income?
Contributions and earnings within qualified plans are tax-deferred until withdrawn (not subject to regular tax or AMT).
Intra family transfers common examples
Employing family members
Sale and gift-leasebacks
Family limited partnerships (FLPs)
Installment sales and self-canceling installment notes (SCINs)
Private annuities
Intra family transfer
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.
Employing Family Members in a Business
Benefits
Lower Tax Rates: Children often have lower tax brackets than parents, leading to tax savings.
