how to read a tax return - cash flow to determine spousal maintenance & child support

How to Read a Tax Return(Cash Flow to Determine Spousal Maintenance and Child Support)

Howard Kaminsky, CPA, ASA

Chris Riley, CPA/ABV

CBIZ MHM, LLC

Minneapolis, MN

Topics to Discuss

• Analysis of an individual tax return (Form 1040) and cash flow

– Spousal Maintenance– Child Support

• Other items to consider on an individual tax return

– 1040 line 15a & 16a – Pensions, IRA, 401(k) distributions

– 1040 line 25 – HSA deduction– Sch A line 12 – Points paid on refinance– Sch A line 14 – Investment interest– Sch B – Interest and dividend income– Sch D – Capital loss carryforwards– Sch E – Rental and business activity

• Definition of Income– Spousal Maintenance– Child Support

• Other Tax Definitions– Dependency exemption– Qualifying child– Filing status options– Head of household status– Other – amended returns

• Costs of Getting Divorced– Nondeductible costs– Deductible costs (legal or accounting)

• Alimony vs Child Support

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Topic 1

• Analysis of an individual tax return (Form 1040) and cash flow– Spousal Maintenance– Child Support

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Topic 2

• Other items to consider on an individual tax return– 1040 line 15a & 16a – Pensions, IRA, 401(k) distributions– 1040 line 25 – HSA deduction– Sch A line 12 – Points paid on refinance– Sch A line 14 – Investment interest– Sch B – Interest and dividend income– Sch D – Capital loss carryforwards– Sch E – Rental and business activity

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Topic 3

• Definition of Income– Spousal Maintenance– Child Support

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Income for Spousal Maintenance Purposes

• Income includes any form of periodic payment to an individual, including, but not limited to: – Wages– Salaries– Payments to an independent contractor– Workers’ comp– Unemployment benefits– Annuities– Military and naval retirement– Pension and disability payments– Income from pass through entities (i.e. partnerships & s-corps)

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Income for Child Support Purposes

• MN Statutes section 518A.29 define gross income as including any form of periodic payment to an individual, including, but not limited to:

– Salaries and wages, before any deductions– Commissions– Self-employment income– Workers’ comp– Unemployment benefits– Annuity payments– Military and naval retirement benefits– Pension and disability payments– Spousal maintenance received under a previous order– Social Security or veterans’ benefits– Potential income: $22,620 (150% of Federal minimum wages)– Income from pass through entities (i.e. partnerships & s-corps)

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Topic 4

• Other tax definitions– Dependency exemption– Qualifying child– Filing status options– Head of household status– Other – amended returns

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Dependency Exemption• The custodial parent is entitled to claim a child as a dependent.

• They can waive the right to claim the exemption in writing and by filing IRS Form 8332.

• For 2012, the value of the exemption is $1,520 ($3,800 x 40%).

• For 2012, there is no longer a phase out of the personal exemption. In 2013 the phase out returns.

• Other Issues:– Medical expense deduction: A child’s medical expenses paid by a parent can be

claimed as an itemized deduction, even if the exemption for that child has been waived.

– Child care credit: The custodial parent can claim the child care credit even if they relinquished the dependency exemption.

– Earned income credit: The custodial parent can claim the earned income credit even if they have relinquished the dependency exemption.

– Head of household filing status: Lower head of household tax rates require custody of the dependent for more than half the year. If the dependency exemption is waived, the taxpayer can still claim head of household rates, so long as the custody requirement is met.

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Uniform Definition of a Child

• To be the qualifying child of a taxpayer, a person must satisfy four tests:– Relationship: The person must be the taxpayer’s child or

stepchild, foster child, sibling or stepsibling, or a descendent of one of these.

– Residence: The person must have the same principal residence as the taxpayer for more than half of the tax year.

– Age: The person must be under 19 at the end of the year, under 24 if a full-time student, or permanently and totally disabled.

– Support: The person must not have provided more than half of his or her own support for the year.

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Filing Status Options

• Married filing jointly• Married filing separately• Head of household• Single

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Head of Household Status

• To qualify for head of household tax rates, the taxpayer must:– Be unmarried on the last day of the tax year, or have lived apart

from the spouse for the last six months of the year, filing a separate return

– Not be a surviving spouse– Not be a non-resident alien at any time during the tax year– Have paid over half of the cost of keeping up a home during the

year for a child, stepchild, or foster child claimed as a dependent (unless waived)

• Also includes dependent relatives for which an exemption can be claimed

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Other Filing Status Issues

• Joint to Separate Returns:– If a joint return is filed, the taxpayers may not amend and file

separate returns later.

• Separate to Joint Returns:– If separate returns are filed, the taxpayers may later amend and

file a joint return if the amendment is made timely.

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Topic 5

• Costs of Getting Divorced– Nondeductible Costs– Deductible Costs (legal or accounting)

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Costs of Getting Divorced

• Legal and professional fees as well as court costs related to getting a divorce are generally not deductible. Payment of former spouse’s attorney or professional fees are also not deductible, unless they meet the requirements of deductible alimony (Sec. 71 payments).

• Nondeductible costs:– Expenses paid in arranging child custody and support.– Expenses paid in arriving at a financial settlement and retaining income-producing property.

• Deductible costs (legal or accounting):– Fees paid for tax advice related to a divorce.– Fees paid to determine or collect alimony.– Fees paid to determine estate tax consequences of a property settlement.– Fees paid to professionals such as appraisers and actuaries if the services were performed to determine

the correct amount of tax or to assist in obtaining alimony.– Obtain deductibility breakdown from attorney or accountant.– The expenses will be deducted as miscellaneous itemized deductions subject to the 2% limitation and also

a preference for AMT purposes.

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Topic 6

• Alimony vs Child Support

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Alimony vs Child Support

• Qualifications of Alimony – Sec. 71(b)– Cash payments or third-party payments required under divorce or separation instrument– Payments must be required by written instrument– Instrument may not designate the payment as “not alimony”– Spouses may not be members of the same household– Payments may not be treated as child support– Payments must cease upon the death of the recipient– Parties may not file a joint return

• Payments that do not qualify as alimony:– Child support– Non-cash transfers– Payments that are the spouse’s part of community property income– Payments for use of property– Payments to keep up the payer’s property

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Thank you!

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