Chapter 5 v2 - Income Taxation: Chapter 5 Gross Income:...

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Unformatted text preview: Income Taxation: Chapter 5 Gross Income: Inclusions 1 Alimony s General rule: s Deduct alimony paid from Deduct income of payer; income s Include alimony received in Include income of recipient income 2 Current Alimony Rules s To be “alimony” five tests must be met: s s s s s Must be a cash payment Payments must be required under a written decree or Payments separate maintenance agreement separate Payments must cease with death of recipient Alimony payments cannot be designated for support of Alimony children or contingent on them children H&W cannot file MFJ s H&W can specify in the decree that amounts transferred H&W are not to be considered alimony to s A payment isn’t treated as alimony unless child support payment payments are current (paid-up) payments 3 Example s Alimony specified at $500/month; child support of Alimony $600/month, both due first day of the month. Paying spouse loses job and misses the Oct., Nov., and Dec. payments. Payer resumes payments on Jan. 1. Jan. s Child support in arrears: 3 X $600 = $1,800 s Child support payments must be current before the Child TP gets a deduction for payment of alimony. 4 Example Total Paid 1/1 2/1 3/1 4/1 5/1 $1,100 $1,100 $1,100 $1,100 $1,100 Child Support Alimony Due Deemed Paid Paid $2,400 $1,900 $1,400 $900 $600 $1,100 $1,100 $1,100 $900 $600 $0 $0 $0 $200 $500 Comment: Quite often, the amount of alimony awarded is higher because it is assumed it will come from pre­tax income. 5 Alimony vs. Child Support Tax Consequences of Alimony & of Child Support Tax s Problem of distinguishing between alimony and Problem child support child s Sometimes these are not separately stated s To be child support, payments must be: s Fixed in amount, or contingent on the child’s status, and s Paid solely for support of children, and s Paid under a decree or written agreement 6 Alimony vs. Property Settlement s The problem of distinguishing a “property The settlement” from “alimony” settlement” s Conceptual Difference: alimony is for maintenance of Conceptual life; property settlement is a division of property. life; s Alimony has current tax effects; a property settlement Alimony does not does s Disguising property settlements as alimony may Disguising produce tax advantages for some TPs. 7 PROBLEM Payments to Ex-Spouse How to Distinguish Alimony from Property Settlements How $ 1 2 3 4 Year 5 Are payments in years 1 & 2 alimony or disguised property settlements? disguised Alimony vs. Property Settlement s To reduce game playing, recapture of “excess To alimony” is required - See pages 5.4 and 5.5 alimony” s Pre-1985 divorces -- no recapture required s 1985-1986 divorces have complex recapture rules with 1985-1986 five years lookback five s 1987-present divorces have somewhat simplified 1987-present recapture rules with three year lookback recapture s Requiring alimony to be only cash payments Requiring reduces game playing also reduces 9 Inclusions s Annuities: Commercial Annuities: s Exclusion Ratio (key!) s Deferred Annuities (LIFO) s Early W/D Penalty (59 1/2) 10 Exclusions s Group-term Life Insurance Premiums - Sec. 79 s General rule: Employees may exclude premiums on the first $50,000 of group-term life insurance that are group-term paid by the employer. (The cost of group-term life insurance over $50,000 face value is included in the TP’s income according to IRC Sec. 79) TP’s s Limitations: s Exclusions available only under qualified plans s Exclusion not available for S/P, Partners, S/H(s) s No exclusion for employer-paid whole life insurance 11 EXAMPLE: Employer Provides EXAMPLE: Premiums on Group-Term Life Insurance Premiums Employee Name Age Insurance Coverage Coverage >50,000 Factor* Jack 41 70,000 20,000 1.20 Donna 38 48,000 0 1.08 Julie 46 95,000 45,000 1.80 Jack’s income from employer-paid premiums: 20,000/1,000 X 1.20 = 24.00 income/yr. Julie’s income from employer-paid premiums: 45,000/1,000 X 1.80 = 81.00 income/yr. *Factors from Uniform Premium Table 1 12 Exclusions s Life Insurance Proceeds -- Sec. 101(a) s General Rule: Life insurance proceeds are excluded from income of the beneficiary, but are subject to estate taxes for the insured the s Exception: If life insurance policy is transferred for valuable consideration, i.e., is sold, benefits are taxable to the extent they exceed the holder’s basis. the Example: A sells insurance policy to B for 30,000; FV = 50,000. Tax result? (Transfer for Value rule: p. 5.24) p. 13 ...
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