tax law cle: tax law for family law practitioners · 2019. 10. 22. · how to request is relief...

Tax Law CLE: Tax Law for Family Law Practitioners

Prairie State Legal Services

400 W. Roosevelt RoadWheaton, IL 60187

T: 630-690-2130F: 630-690-2279www.pslegal.org

http://www.pslegal.org/

About our Low Income Tax Clinic

Provides free legal advice and representation to low income individuals in PSLS’s 36-county service area.

Individuals can call1-855-TAX-PSLS to see if they are eligible for services. Must be under 250% of

poverty (a small number of clients over 250% of poverty accepted)

Issues the LITC Handles:

Controversy (no return preparation)

Collections Offer in Compromise / Currently Not Collectible

Liens/Levies/Garnishments

Exams / Audits Automated

Correspondence

Field / In person

Litigation U.S. Tax Court

U.S. District Court

Identity Theft

Innocent Spouse Relief

Issues to Cover…

Filing Requirements

Filing Status

Innocent/Injured Spouse Relief

Exemptions

Credits

Collection Options

Resources

Q & A Session

Federal Form 1040: Page 1

5

Personal Information

Filing Status

Exemptions

Dependents

Income

= Adjusted Gross Income

- Adjustments to Income

Income


Federal Form 1040: Page 1 and 2

6

Personal Information

Filing Status

Exemptions

Dependents

Income

= Adjusted Gross Income


Adjusted Gross Income

(Standard / Itemized Ded) (Exemptions)

= Taxable Income

Tax

(Non-Refundable Credits)

Income Tax Withheld

Payments

- Taxes Owed

= Refund or Amount Due

= Payments

+ Refundable Credits

Taxes Owed

When is a person required by IRS to file?*

See Publication 554

Excludes self employment income

How Much is at Stake - POLL

It’s March 20, and your client comes to your office. She tells you that she has two young children, and worked part-time, about 32 hours per week, and earns $9.00 per hour. What do you think her refund would be?

A - $700

B – $1,550

C – $3,329

D – $6,275

E – not enough to file a return

Why Should Your Client File Even if Not Required?

The Federal EIC in Tax Year 2016

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Cre

dit

Am

ou

nt

($)

Income ($)

No Children 1 Child 2 Children Married Filing Jointly

Maximum Benefit $6,269

M

Maximum Benefit $506

3 or More Children



Why Should Your Client File Even if Not Required?

To get a refund, of course!

To claim credits

Earned Income Tax Credit & Child Tax Credit

Health Premium Tax Credit

Education Credits

May be a prerequisite for public benefits

IL Benefit Access Program (formerly “Circuit Breaker”)

Social Security

If the client is applying for financial aid (FAFSA)

Can prevent (or uncover) identity theft

Filing Status

Five Different Options:

Single, Married Filing Jointly, Married Filing Separately, Head of Household, Qualifying Widow(er) with Dependent Child.

Status determines standard deduction

Status determines tax “structure”

Pros Cons

Usually lower tax rates for MFJ

Eligible for certain deductions and credits not available to MFS filers

On a joint return, both TPs are liable for the tax bill and any issues that come up with the return *

Refund can be applied to certain debts owed by one of the TPs*

*relief may be available

Pros/Cons of Married Filing Jointly

Innocent Spouse Relief – Hypo

Client is in an abusive relationship in which the spouse controls all of the household finances, and the abused

spouse is left in the dark as regards to household income. Abuser goes to the casino and wins $50,000.

The income is not reported on the tax return. The couple file a tax return for tax year 2011, and does not

claim the gambling winnings. In 2012, the couple splits. In 2013, the IRS examines the under-reported income, and assesses taxes, interest and penalties of

$15,000. The abused spouse is on the hook for the tax.


Spouse can sever liability assessed on joint return Remember – Joint return = J&S liability for understatements and

underpayments of tax.

Tax must be attributable to other spouse. Example – couple owes money because of H’s gambling winnings which

was kept from W, then the tax is attributable to H and W can request Innocent Spouse relief.

Cannot just argue the tax is attributable to other spouse If spouse knowingly signed joint return without force or duress, then

they are both on the hook for debt.

Simply stated – “Not my tax” + compelling circumstances.


Successful cases involve:

Domestic abuse

Financial manipulation

Mental illness

Other similarly compelling circumstance.

If these circumstances arise, your client should consider requesting innocent spouse relief.

How To Request IS Relief

File form 8857 and send to Covington, KY.

Requesting Spouse notified by IRS within 30-45 days.

Non-requesting spouse notified by IRS.

Collections and Collection SOL is suspended while reviewed.

Victims of domestic violence should write “Victim of Domestic Abuse” at the top of form 8857.

BEST PRACTICE: Advise client to e-file on the first day possible, even if there is no filing requirement. This will eliminate potential innocent spouse cases as well as improper claiming of dependents, and also reduces the risk of identity theft as well.

Injured Spouse

To qualify for an Injured Spouse Claim or Injured Spouse Allocation, client must have: Filed a joint return.

Client does not owe the debt.

Client earned some income on the joint return.

Client paid part of the taxes shown on the joint return through withholdings or refundable credits.

File Form 8379 with the taxpayers tax return.

If successful, the IRS will separate the return and apportion his/her return to the requesting spouse.

The other spouses refund will be applied to the IRS debt.

Exemptions (Dependency)

Types of Exemptions

Personal Exemption

Dependency Exemption

Exemption value in 2015 = $4,000.

E.g., a family of 5 will have 5 exemptions, totaling $20,000, which will reduce the taxpayer’s taxable income.


Reduces taxable income

Makes the taxpayer eligible for credits such as CTC and EITC


Test – must have a “qualifying person”

Either a “qualifying child” or a “qualifying relative”

Who Claims The Kids?

“Joint Custody” or equivalent = tax nightmare

Often decrees will have a “tax holiday” where one parent will get an extra day to make it a 51/49 distribution.

Put the date in the decree, as residency is a key test for dependency and other credits.

Regardless of decree, IRS tests rule dependency

Residency for IRS purposes comes down to how many nights the child lives with each parent.

Must be more than ½ of the year (it does not need to be

consecutive, and there are exceptions for birth, temporary absence, death, and kidnapping

Releasing the Exemption Form 8332

“I have given him

everything—I am NOT

giving him the exemption,

no matter what!”

Releasing and Revoking the Release of the Exemption IRC § 152(e), Form 8332

Why release?

Take the following fact pattern for example. A married couple with three children (all <17) get divorced. The ex-husband earns $65k per year, and the ex-wife earns $10k per year. Since the ex-wife earns so little, the exemptions are not worth that much from a tax perspective.

No Release After ReleaseEx-Wife Ex-Husband Ex-Wife Ex-Husband

Income $ 10,000.00 $ 65,000.00 $ 10,000.00 $ 65,000.00 Exemptions 4 1 1 4

Standard Deduction $ 8,500.00 $ 5,800.00 $ 8,500.00 $ 5,800.00

Exemption Amount $ 14,800.00 $ 3,700.00 $ 3,700.00 $ 14,800.00

Taxable Income $ - $ 55,500.00 $ - $ 44,400.00

Child Tax Credit $ - $ - $ - $ 3,000.00 Tax $ - $ 10,006.00 $ 7,315.00EITC $ 4,511.00 $ - $ 4,511.00 $ -ACTC $ 1,050.00 $ - $ - $ -

Refund $ 5,561.00 $ (10,006.00) $ 4,511.00 $ (4,315.00)

RESULT – WIN / WIN / WIN

Before release:

Ex-wife: $5,561 refund

Ex-husband: $10,006 tax owed*

After release

Ex-wife: $4,511 refund

Ex-husband: $4,315 tax owed*

Child support increases by $1,821

Result

Wife is ahead $771 ($1,821 child support - $1,050 less refund)

Husband saves $3,870 ($5,961 reduction in tax less increase in child support of ($1,821)

*not factoring yearly withholding

Exemption Planning

Negotiate the Exemption

If decree is silent, it goes to the custodial parent

Can condition release on staying current with support

Maximize the Exemption

Don’t let it go to a parent with very little income.

Joint Custody Pitfalls

Avoid joint custody orders allocating that the child lives with one parent for exactly half of the year.

See Pub 501 for more information on exemptions

Earned Income Tax Credit

EITC is NEVER TRANSFERRED/ASSIGNED/RELEASED

Key Features:

Refundable

Must file a return to claim EITC

Must have “earned” income

Cannot file MFS

Must have SSN

EITC is a function of: 1) the amount of earned income; 2) filing status; 3) amount of “Qualifying Children.”

LOTS of abuse/fraud in EITC claims.

The “Race to File” Problem

Since so much refund money is on the line, taxpayers “race” to claim dependents that they are not entitled to claim.

Subsequent filer’s return will be rejected

Generally triggers an audit of one or both taxpayers

May have tie-breaker issues:

TB1: Parent with whom the child resided the longest in that tax year;

TB2: If 50/50, the parent with the highest AGI claims exemption

The Federal EIC in Tax Year 2016

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Cre

dit

Am

ou

nt

($)

Income ($)

No Children 1 Child 2 Children Married Filing Jointly


M

Maximum Benefit $506

3 or More Children



Qualifying Child for EITC

Similar to test for dependency exemption

Support is generally not a factor

See Pub 596 for more information

Earned Income Tax Credit

EITC is NEVER TRANSFERRED/ASSIGNED/RELEASED

Key Features:

Refundable

Must file a return to claim EITC

Must have “earned” income

Cannot file MFS

Must have SSN

EITC is a function of: 1) the amount of earned income; 2) filing status; 3) amount of “Qualifying Children.”

LOTS of abuse/fraud in EITC claims.

Taxable

• Almost Everything

• Damages (compensatory, punitive, liquidated)

• Interest

• Lost pay (back pay, front pay, etc.)

• Employment discrimination claims

• Lost profits

• Loss of Goodwill, damage to reputation

• Maintenance & unallocated support

Non-Taxable

• Few awards/settlements are non-taxable:

• Personal Physical Injury and Physical Sickness

• Return of Capital NOT Exceeding Basis

• Child Support

“That Depends”

• Facts and circumstances will determine tax outcome:

• Emotional Distress (needs to be as a result of physical injury or sickness to avoid tax)

• Cancellation of Debt (always taxable, but exclusions may apply)

• Attorneys’ Fees & Costs

Collection Alternatives

Currently Not Collectible (CNC) Status

Offer In Compromise

Installment Agreement

Full Pay w/in 120 Days

Bankruptcy

Free Tax Preparation

Volunteer Income Tax Assistance (VITA) Clinics

Visit www.irs.treasury.gov/freetaxprep

Call 800.906.9887

Tax Counseling for the Elderly (TCE)

Visit http://www.aarp.org/applications/VMISLocator/searchTaxAidLocations.action

My Free Taxes

http://www.myfreetaxes.com

Free File Alliance

http://www.freefilealliance.org

http://www.irs.treasury.gov/freetaxprep

http://www.aarp.org/applications/VMISLocator/searchTaxAidLocations.action

http://www.myfreetaxes.com/

http://www.freefilealliance.org/

END

Questions?

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Feedback?

Please contact me:

[email protected]

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tax law cle: tax law for family law practitioners · 2019. 10. 22. · how to request is relief...

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