Tax Tip of the Week*

CHILD SUPPORT VERSUS ALIMONY It is fairly common in divorce actions that the higher earning spouse will be obligated to pay both alimony and child support. For instance, think in terms of $3,000 a month alimony plus $1,000 a month child support. What happens sometimes is that the entirety of the payments are not made – perhaps a couple of months are skipped, or a few months are shortchanged. When that happens, the tax law is clear that monies are treated as first being for child support (meaning not deductible by the payor and not taxable to the recipient); and then only after that year’s child support obligation is met is the remainder allowed to be treated as alimony.

Kal's Kweries**

KWERY:A number of years ago, while I was married, my parents gifted me a 5% interest in a family business. I don’t work in that business, I just get dividends every once in a while. I’m getting divorced now, and my husband is demanding that we value this 5% interest and he get a piece of it.

RESPONSE:In virtually every jurisdiction, the value of a gift (or inheritance) is not up for grabs in a divorce – except to the extent there has been an increase in the value during the divorce and further (and this may depend on which state you are in) only where either or both spouses played a role in increasing that value. What you are describing sounds like a situation where your husband will have no claim to any part of that value since you had no role in increasing it (if it went up) during the marriage, and further the starting point is that it was a gift.

Tax Tip of the Week*

EXEMPTION TAX BENEFIT
Many times in a divorce, even after custody of a child has been determined, there is an argument or battle over who is to get the exemption on the tax return for that child. The basic rule is that the exemption goes to the custodial parent; but that can be waived by signing off and giving that right to the non-custodial parent. However, it is important to recognize the economic realities of the exemption. Under current tax law, the exemption deduction is phased out above a certain level of income. Thus, for a “high earner”, there is no tax benefit to claiming the exemption.

Kal's Kweries**

KWERY:I own 25% of a business, and my partners are pushing me out. We need to get the business valued, but I’m concerned that they’re going to use all kinds of discounts to reduce what I should be entitled to. How do I handle that problem?

RESPONSE:Generally speaking, and by all means you need to check with legal counsel (it can depend on what state you are in), if you are being pushed out of a business, you might have a claim based on shareholder/partner oppression. If that’s the case, again generally speaking, discounts against the otherwise determined value would not be allowed. That is, in those situations typically fair value is considered the appropriate standard of value – not fair market value (which often includes discounts).

Tax Tip of the Week*

EXEMPTION FOR A CHILD
The rules for claiming a child as an exemption by a divorced parent are rather simple and straightforward. Barring a written agreement otherwise, only the parent who has custody of the child for more than half the year can claim that child as an exemption. It does not matter who is paying child support or how much the child support is. Custody determines the exemption. The exception is that through the use of Form 8332, the custodial parent can waive the exemption for any particular year of for a series of years. That form needs to be attached to the tax return of parent claiming the exemption

Anecdote of the Week

HE AIN’T COSTLY, HE’S MY BROTHER
We were investigating a car dealership, and one of our concerns was of course payroll, and whether there were any friends or family on the books that perhaps shouldn't have been. We were provided with a room to work in, and were told that the person who occupies that office wasn’t around that day so it was available for us. Interestingly, that office was bare of anything that made it personal, had a quarter inch layer of dust on all the surfaces – and, oh yes, was allegedly the office of a family member (one of our target payroll items). To top it off, in a brief discussion with the company bookkeeper, she advised that was an extra office, unoccupied

Tax Tip of the Week*

ESTIMATED TAXES
For many people receiving alimony, for the first time they will experience the need to make quarterly estimated taxes. Most of us are used to receiving our income in the form of a W-2 – with withholding taxes as part of that process. Thus, your taxes (whether some or all) are covered by withholding against your salary. Alimony payments are not subject to withholding. Thus, depending on various factors such as the amount of the alimony and whether or not you have other income, it is very possible that you will need to make quarterly estimated tax payments. Keep in mind that the obligation to make estimated tax payments will probably be not only to the IRS but also to your state.