Tax Tips For The Divorcing Couple

When you are caught in the throes of a divorce, the last thing on your mind is how you are going to file your taxes in April.  What you do not know can hurt you, so take the time now to identify possible issues you may face.

Can we still file a JOINT return?  Unless you have been legally separated before December 31, you may still elect to file a joint return.  The real question is, should you?  By filing a joint return, you and your spouse are agreeing to be “jointly and separately liable for any errors, omissions or deficiencies” on the tax return.  If you are concerned that your spouse might be under-reporting income or over-reporting deductions, it may be wise to consider alternative filing statuses.  If you choose to file separate tax returns from your spouse, you have the option of filing an amended joint return within three years from the original filing to receive any tax benefits you gave up by filing separately.

Is filing SEPARATELY my only option?  If you provided more than half the cost of keeping up a home for a child, dependent parent, or other qualifying relative for more than half the year, you may be able to file using the Head of Household status.  Keep in mind, if you choose to file as Married Filing Separately, special rules apply effecting your ability to chose between the standard and itemized deductions as well as disallowing dependent care credits, education credits or deductions, earned income credits, the taxability of previously exempt interest income, and even your ability to make Roth IRA contributions or conversions. 

How do I qualify for HEAD OF HOUSEHOLD status if we are still married?  The IRS says that in order to qualify, you must either be unmarried or considered unmarried on the last day of the year.  So how does this work?  If you and your spouse lived apart for the last six months of the year, you would be considered unmarried for the purpose of this filing status under the Abandoned Spouse rule.  If you meet the other two requirements for this status, you would be eligible to file as Head of Household.  The other two requirements are 1) paying more than half of the cost of keeping up a home as of the last day of the tax year 2) a dependent child or other relative lived with you for more than half the year or you have a dependent parent (dependent parents are not required to live with you).

So when do I file as SINGLE?  You would be required to file as Single if you are unmarried as of December 31 or if you are legally separated as of the end of the year and you do not qualify for another filing status.

So, who gets to claim the children?  Generally, the right to the dependency exemption for the children goes to the custodial parent.  For official or unofficial joint custody arrangements, the exemption goes to the parent in whose home the child spent the most number of nights.  If custody is truly equal, the parent with the highest adjusted gross income gets the deduction.  Beginning with tax year 2009, it is no longer required that the custodial parent provide more than half of the child’s support.  Instead, the only requirement is that the child cannot provide more than half of his own support.

What if we agreed I would have tax rights for the children even though they live with my spouse?  If you and your spouse have agreed to share or transfer tax rights for the children, a copy of Form 8332 must be signed by the custodial parent and attached to the tax return of the noncustodial parent.  This election can be for the current year or for future years.  This form can also be used to revoke the assignment of the dependency exemption.

My spouse transferred the house to me.  Do I have to pay capital gains tax?  No gain or loss is recognized on the transfer of property between spouses either as related to the divorce or if transferred within one year of the termination of the marriage.  This pertains to property transferred directly or indirectly through a trust.[1]

We made joint estimated tax payments last year.  Can I apply those payments to my current tax liability?  If you and your spouse made joint estimated tax payments but are not filing as Married Filing Jointly you may still be able to claim some or all of those payments on your return.  The IRS says that the allocation of estimated tax payments can be made in any way that is agreed upon by your and your spouse.  If you are unable to agree, the IRS regulation 1.6015(b)-1(b) provides that the estimated tax payments are to be allocated based on your percentage of the combined tax liability of you and your spouse.

This is just the tip of the iceberg.  Every divorce is different and so is the impact on your income tax situation.  Contact me to discuss the right year-end tax planning for your specific needs.  716-630-0600 x 208

cmealey@songincpa.com or (716) 630-0600 x 208

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[1] IRS Code 1041(a)

'Tis The Season .... For Stealing?

There is a direct correlation between tight financial times and the probability of your business suffering a loss due to employee theft. Whether the catalyst is the economic recession or an upcoming holiday, financial pressures on the family budget could put your company at risk.

The median loss for privately owned companies is $231,000 according to the Association of Certified Fraud Examiners (ACFE). Isn’t my company too small to be a target? The reported median loss for businesses with less than 100 employees is $155,000 and small businesses represent 31% of all victim organizations!

So how do I know if my company is at risk? Employee theft tends to occur in situations where the person is having financial difficulties (36%), has the opportunity and access (22% worked in the accounting department) and believes the chances of getting caught are low (detection time on cash thefts is between 17-30 months).

My bookkeeper has been with us for 10 years, doesn’t that mean my company is safe? Over 50% of perpetrators have worked for their employer for at least 5 years. However, the longer the person was employed, the greater the reported loss amount. Employees holding positions for 6-10 years stole and average of $231,000. 50% of perpetrators were over the age of 40 and the majority (33%) were between 41-50 years old.

So what should I look for? Billings to fictitious vendors, check tampering (forgery or alterations), cash related thefts, product related thefts, and payroll frauds (payment to fictitious employees or double paychecks to actual employees) are most commonly see in small businesses.

How can I protect my company? The key to deterring employee theft is good internal controls. The problem some businesses face is there simply aren’t enough employees to make implementing the controls possible. Surprise audits are the most effective tool for deterring and detecting employee theft, but how many companies can afford to keep an internal auditor on payroll?

It’s not always possible for the business owners to handle every piece of operations, but it’s a good idea to get more involved with high-risk activities (verifying cash receipts, making deposits, reconciling bank accounts, checking purchases and inventory) on a consistent basis or to obtain the assistance of an independent CPA.

How can I make my controls better and my company safer? Every business is different, but there are several simple controls that can be implemented for little or no cost.  Contact us today for a free consultation and a little more peace of mind.

cmealey@songincpa.com or (716) 630-0600 x 208