While many of us routinely find ourselves burdened with a host of issues when preparing our tax returns, those who got divorced last year or are in the midst of a divorce may find themselves dealing with new tax issues. A recent article on avvo.com lists some of the most common tax questions that arise for divorced or divorcing individuals.
Find the full article here.
Not only is Aronson’s Tax team comprised of leading tax experts, Aronson also has a dedicated group of professionals who handle litigation support, and specialize in divorce and family law matters. For more information, please contact Sal Ambrosino, CPA, ABV at 301.231.6272.
The IRS has just announced that it has acquiesced and will follow the Ninth Circuit’s ruling that the qualified residence interest limitations described in IRC Section 163(h)(3) should be applied on a per-individual basis, and not per residence.
Bruce Voss and Charles Sophy were registered as domestic partners (for federal tax purposes unmarried) in California. The two co-owned, as joint tenants, two properties located in Beverly Hills and Rancho Mirage. Each property was financed with a mortgage secured by the property for which the Taxpayers were jointly and severally liable. The total average balance for the mortgages was $2.7 million for the years challenged by the IRS. Each Taxpayer reported an interest deduction for half of the mortgage interest paid on the properties. The IRS audited their returns and calculated the limitation for the interest deduction by aggregating the total debt of both properties, and then limited the Taxpayers to their proportionate share of a qualified residential interest deduction on $1.1 million of debt. The Tax Court agreed with the IRS.
The Taxpayers appealed the Tax Court’s ruling to the Ninth Circuit where the court determined that the Tax Court and the IRS had erred in aggregating the debt of these non-married individuals and ruled in favor of the Taxpayers. The Ninth Circuit explained that when there are two or more unrelated owners of the same property, each owner’s undivided interest is considered a separate residence and the use of even a portion of a property may meet the definition of a “qualified residence.” The ruling further explained that a co-owner’s fractional share of the mortgage debt should be considered separately when calculating the interest deduction. Therefore, each Taxpayer was entitled to claim a deduction for qualified residence interest on debt up to the statutory limit of $1.1 million.
What does this mean for you?
If you are unmarried and you and your partner own two homes, which you use as residences with mortgage and home equity indebtedness in excess of $1.1 million, you should review your tax returns with your CPA to see if previously filed returns should be amended to claim additional interest deductions. If you are contemplating marriage, this may also be a consideration in your financial planning as the loss of the mortgage interest deduction may be a significant cost of marriage.
If you are married and in the process of divorce, this may be a planning opportunity for additional tax savings. There are rules which allow an ex-spouse to treat the former family residence as a principal residence even after moving out. Under the right circumstances, you may be able to claim an interest deduction on up to an additional $1.1 million of mortgage debt.
Please contact Aronson if you’d like to know if this opportunity is right for you.
For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services we provide, click here or call Sal Ambrosino at 301.231.6272
Hopefully you’ve seen our recent blog posts related to the tax aspects of divorce. As a bit of a break this summer, I thought I would share thoughts from the IRS on How a Summer Wedding Can Affect Your Taxes, from their website.
The article touches on some of the basic changes that affect a taxpayer’s return. If the article applies to you, congratulations and best wishes for a lifetime together.
For more information regarding Aronson’s Financial Advisory Services Practice, and the forensic accounting and litigation support services we provide, click here or call Sal Ambrosino at 301.231.6272.
Pat and Jordan were married and lived in the same jointly owned home for 9 years. After their divorce, Jordan lived in the home with their three children. Now, seven years after the divorce, Jordan is selling the house and both parties are asking their respective CPAs how much of the gain may be excluded from their returns. As the professor in my corporate tax class used to say – there is an answer to every tax question: it depends.
In this sad case, these good people still cared about each other and their kids, and had what might be described as a very amicable divorce. They agreed on how the property would be divided and that Jordan would continue to live with the kids in the family home. They decided there was no need to spend gobs of money for professional fees and that their mutual understanding and cooperation would cover most situations that arose. As a result, the divorce agreement, which they signed and gave to the court was very informal and silent as to the disposition of the marital home. As far as they were concerned, this was no problem. They continued to share ownership and both contributed to the mortgage and property taxes. Jordan paid for most of the maintenance and upkeep.
What did the CPAs say about the exclusions?
As a condition for claiming the full exclusion on the sale of a principal residence a taxpayer must have, among other things, owned the property and used that property as a principal residence for at least two of the last five years. While Pat continued to own the property after the divorce, only Jordan used the property as a principal residence.
Because the divorce instrument was silent with regard to Jordan’s continued use of the marital residence, at the time of sale Jordan may claim the $250,000 but Pat gets no benefit of an exclusion and must report the entire gain. Pat no longer was eligible for the exclusion since Pat didn’t reside in the home for at least two of the past five years prior to sale.
Was there a way Pat could have also excluded $250,000 of the gain?
Yes! Special rules covering the sale of a principal residence in divorce provide that a taxpayer is treated as using the property as the taxpayer’s principal residence for any period the taxpayer has an ownership interest in the property, and the taxpayer’s former spouse is granted use of the property under a divorce or separation instrument, provided the former spouse uses the property as a principal residence. Simply by stipulating in the divorce instrument that Jordan was granted use of the property for a number of years or until some event related to the children (e.g., graduating high school, turning 18, etc.) Pat would have also been able to exclude $250,000 on an individual tax return in the year of sale.
Could the result have been even better?
Yes, again! If Jordan had been married to longtime partner Taylor for two of the five years prior to the sale, then they would have been eligible to claim a $500,000 exclusion for the sale on their joint return, while Pat would still be eligible for the $250,000 exclusion on a single taxpayer’s return.
For more information regarding Aronson’s Financial Advisory Services Practice and the forensic accounting and litigation support services we provide click here or call Sal Ambrosino at 301.231.6272.
Having payments structured as alimony can be an effective tax planning tool. Why? Because alimony is deductible by the payor (typically the higher earning spouse) and taxable to the recipient; the former family unit can reduce, often significantly, its overall tax burden. As we have been exploring in this blog series, sometimes payments the parties identified as alimony turn out to be something else…
The CPA preparing Pat’s tax returns just called to say that $96,000 of the payments made under the agreement will be presumed as child support by the IRS. Pat is dumbfounded. The payments were made according to the separation agreement; they were made in cash to the former spouse. All alimony and child support payments have been made on time. The agreement indicated that the payments were to be alimony and the parties expected that they would be deductible by Pat and taxed to Jamie.
How did this happen?
As required by the separation agreement, Pat paid Jamie $6,000 per month for three years until Taylor turned 18, then paid $4,000 per month for one year until Avery turned 18, at which time the payments were reduced to $3,500 per month.
Under these circumstances, the rebuttable presumption is that the payments in excess of $3,500 per month are deemed child support.
Certain spousal support payments (alimony) are deemed to be child support regardless of how they are described in a divorce decree or separation agreement. When a written instrument calls for a reduction in payments as a result of a contingency relating to a child, those payments will be treated as child support for income tax purposes regardless of the description in the written instrument. Examples of contingencies related to a child include the child attaining a specified age, marrying, dying, leaving school, or a similar contingency.
Careful planning may have avoided these consequences.
For more information regarding Aronson’s Financial Advisory Services practice and the forensic accounting and litigation support services we provide, click here or call Sal Ambrosino at 301.231.6272.