TAX CONSEQUENCE OF SPOUSAL SUPPORT

FYI-Flint Divorce Bankruptcy Attorney Terry R. Bankert 235-1970, www.attorneybankert.com  asks DID YOU KNOW?.From Creative Tax and Financial Planning to Settle the Challenging Divorce Case Joseph W. Cunningham Joseph W. Cunningham JD CPA PC Troy

I. Use of 71 Payments to Advantage

A. What are Section 71 payments?

1. They are essentially another name for alimony, or spousal support, payments
that qualify as taxable to the payee under IRC Section 71 and deductible by
the payer under IRC Section 215.

2. Because Section 71 payments can be used to considerable advantage in
structuring divorce settlements it is important for family law practitioners to
have a working knowledge of the rules to avoid missteps and to effectively
use Section 71 payments to save taxes and facilitate settlements.

B. What are the requirements to qualify under IRC 71?

1. Cash—Payments are in cash. Services, property, or the use of property do
not qualify.

2. Receipt—Payments are received by the payee spouse or constructively
received by a third party for the spouse’s benefit pursuant to a divorce or
separation instrument.

3. Pursuant to Qualifying Divorce Document—Payments are made pursuant
to a “divorce or separation instrument”—a judgment of divorce or separate
maintenance; a settlement agreement, incident to such a judgment; a written
separation agreement; or, a temporary support order.

4. Termination on Payee’s Death—The payer’s obligation to make the payments
terminates if the payee dies, and the payer has no obligation to make
any payment as a substitute after the payee’s death.

5. No Disqualifying Designation—The payments are expressly designated as
nontaxable/nondeductible.

6. Living Apart—The parties do not reside in the same household when the
payment is made. An exception applies if one party is preparing to leave the
home and does depart within one month of the payment date. The “not living
under the same roof” provision does not apply to temporary support payments
made pursuant to a court order or written separation agreement during
the pendency of a divorce.

7. No Joint return—If the divorce is still pending, the parties do not file a
joint return.

8. Not Child Support—The payments are not for child support.

Sphere: Related Content

Can you qualify for a Chapter Seven Bankruptcy in Flint or other places, 810-235-1970

DOES IT MATTER WHAT YOUR SPOUSE SPENDS MONEY ON TO QUALIFY FOR A CHAPTER 7 BANKRUPTCY IN FLINT?

Your Consumer bankruptcies under Chapter 7 of the Bankruptcy Code give you the debtors a discharge from most unsecured debts, provide for an automatic stay against collection efforts on those debts, and permit debtors to have a fresh start after discharge.

In Chapter 7 bankruptcy if you make below the median gross income for your sized family you qualify for chapter seven. If above a process called a Means test is applied and you may still qualify to file chapter Seven Bankruptcy.

The Bankruptcy Code  recently overhauled the eligibility requirements for filing a Chapter 7 bankruptcy case. Most notably, a means test  was instituted under 11 USC 707(b)(2)(A). The means test determines the ability of a potential debtor to pay back his or her debts in a Chapter 13 case and permits the court to dismiss or convert a Chapter 7 case if granting relief would be abusive after application of the test.


The process of passing the means test begins by looking at the debtor’s income and comparing it to the annual median income of a household the same size as the debtor’s household.

The term current monthly income (CMI) is defined by the Code as “the average monthly income, from all sources, that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive)” in the preceding six-month period ending on the last day of the last calendar month. 11 USC 101(10A). CMI includes any amount paid by any entity other than the debtor (or, in a joint case, the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and, in a joint case, the debtor’s spouse if not otherwise a dependent).” Id.

After the six-month average is calculated, it is multiplied by 12 and compared with the applicable state’s annual median income for a household of the same size as the debtor’s household according to the U.S. Census Bureau.  If the debtor’s annualized income falls below the annual median income, there is no presumption of abuse and the debtor will be able to continue with a Chapter 7 case. 11 USC 707(b)(7)(A). If the CMI is above the annual median income, further calculations must be performed to determine whether the debtor has passed the means test and qualifies for bankruptcy under Chapter 7.

If married and filing single your spouse’s income is included. Since your non filing spouse pays for some expenses that spouses income is used in this analysis. In the case talked about  here today the Bankruptcy Trustee lost in an attempt to dismiss the bankruptcy because of how the means test was calculated.

The case here is called In the Matter of Wilson Travis Chapter Seven 06-43456 in an opinion written by Judge Marci McIvor published 11/06/2006.

In this case the non filing spouse  was the sole supporter for her mother, daughter and grandchild before and after marriage to the debtor. She brought some debt to the marriage and the marital estate,both of them, accumulated additional debt.

After filing single not joint  the debtors schedules  showed both of their incomes and took a variety of expense calculation to bring in the debtors income under the maximum allowed in a chapter 7 bankruptcy filing without triggering a presumption of abuse condition. The trustee disagreed.

Congress thought it important that debtors show they do not have the means to pay their debt. This process of proving is called a means test. A number of elements are involved in this means test. One is the family size  the debtors was five.

The debtors calculation , in Travis, created an expense called a marital adjustment  which brought him under the wire . The trustee disagreed with its calculation.

The debtors non filing spouse showed a number of expenses . Again her income is used because  she is responsible for her portion of the living expenses.  A resident of the debtors home his mother in law had an income of monthly $450.00.

The debtor had consumer debt  of $29,000.

The trustee claimed double dipping and argued the appropriate means test would show an abuse of discretion. The argument simply put was that since she is counted as a member of debtors residence there by raising the bar of allowed net income why should her expense be allowed to drive down that same income. The trustee said that she cannot deduct food utulity clothing and personal items when the debtor has already done that.

Not all issues are discussed here.

What then is the monthly income of a bankruptcy petitioner.  It is “ The average monthly income from all sources that the debtors received without regards to its taxability. “ Why is the non filing spouse's income used.  The code further states income is “ any amount paid by any entity other than the debtor...on a regular basis for household expenses of the debtor. “.

The spouses income is listed but reduced by the amount not used for household expenses. This is a fact specific analysis subject to interpretation.

Possibly the court thought this was not clear so they provided and example.  If the spouse has substantial income and spends it on luxury items, houses and cars are these household expenses of the debtor.

In chapter 7 cases such as here the non filing spouse's income is looked at if the trustee files a motion for substantial abuse.  Because of this process the courts have and obligation
to look at  the marital adjustment closely.

The court found that the extent the non filing spouse contributed to food and utilities these are clearly contributions to house book expenses. The court excluded the spouses expenses for clothing and personal items.

The amount the debtor can deduct for  gross income for food clothing , utilities, and  personal items is determined  by local and national standards based upon the number of members in the household. The debtors allowable expenses are then fixed.

Expenses must fall within certain limits and categories. Expense limits are governed by one of four financial standards: national standards, local and national standards for transportation, local standards for housing and utilities, and other necessary expenses. 11 USC 707(b)(2)(A)(ii)(I). National standards set limits on expenses for food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous.  

Out-of-pocket health care expenses are also provided for in the national standards. These expenses include medical services, prescription drugs, and medical supplies (e.g., eyeglasses, contact lenses). IRM 5.15.1.8(5). Elective procedures, such as plastic surgery or elective dental work are generally not allowed. Id.

A debtor may exceed national standard limits by 5 percent for food and clothing if the excess is reasonable and necessary.11 USC 707(b)(2)(A)(ii). If the debtor is seeking to exceed the national standard, all expenses should be itemized and documented, including particular special circumstances that make the expenses reasonable and necessary. Further, the debtor should use the IRM national standard expense amount instead of entering the actual expense incurred. IRM 5.15.1.7.3(A).

Transportation expenses are divided into two categories: ownership costs and operating costs. IRM 5.15.1.7(4). Operating costs include maintenance, public transportation, repairs, insurance, fuel, registrations, licenses, inspections, and parking and tolls. IRM 5.15.1.9(1)(B). The categories are broken down by census region and metropolitan statistical area. IRM 5.15.1.7(4)(A). If a debtor lives in an area outside of the metropolitan statistical area, a regional standard will apply. Ownership costs, on the other hand, consist of nationwide figures for monthly loan or lease payments. Id. Under ownership costs, separate amounts are provided for the first car and second car. IRM 5.15.1.9(1)(B). Where the car is collateral, the amount of car payment must be subtracted from the amount provided by the national transportation standards for ownership. Id. The remaining balance, but not less than zero, is the allowable ownership cost under the national transportation standards for ownership. Id.

Housing and utilities standards are established for the county level in each state. IRM 5.15.1.7.

This standard accounts for different family sizes. Two, three, and four family households are specifically provided for and all households over the size of four receive a set amount for each member exceeding four. Similar to the transportation standards, housing and utilities standards are split into two categories: mortgage or rent payment and maintenance, and utilities. IRM 5.15.1.7(4)(A).

Mortgage or rent expenses include mortgage or rent payments, property taxes, homeowner’s or renter’s insurance, interest, homeowner dues, and maintenance. IRM 5.15.1.9(1).

Utilities expenses include gas, electricity, water, fuel oil, bottled gas, wood and other fuels, garbage collection, septic cleaning, and telephone and cell phone service when used as the primary phone service. Id. Debtors are allowed the standard amount for housing and utilities or the amount actually spent, whichever is less.

If the amount claimed is more than the total allowed by housing and utilities standards, the debtor must provide documentation to substantiate those expenses are necessary. IRM 5.15.1.9(1)(A).

Homeowners must make an additional step in the means test to properly calculate their mortgage cost. A housing payment, including principal and interest, real property tax, and insurance payments required by the mortgagee must be subtracted from the amount provided by the mortgage expense. The balance, but not less than zero, is the allowable mortgage/rent expense. Id.

Finally, the debtor is allowed “other necessary expenses” for the categories specified in 11 USC 707(b)(2)(A)(ii)(I).

These expenses must provide for the health and welfare of the debtor and/or the debtor’s family or be incurred in the production of income. IRM 5.15.1.10.

All expenses should be itemized and documented, including particular special circumstances that make the expenses reasonable and necessary. For “other necessary expenses,” you should be able to demonstrate that there is no reasonable alternative. Examples of “other necessary expenses” include child care; dependent care for an elderly, chronically ill, or disabled household member or member of the debtor’s immediate family, 11 USC 707(b)(2)(A)(ii)(III); taxes; health care; court-ordered payments; life insurance; union dues; professional association dues; involuntary deductions; and disability insurance for self-employed individuals.


In contrast the non filing spouse does not have a cap on these expenses. The spouse simply defines them as expenses and the non filing spouse can deduct them from gross income.

The court found using this approach to deductions there was no abuse of discretion. In Travis the means test was calculated appropriately.

Sphere: Related Content

WHAT MUST FLINT DO TO CAUSE REAL CHANGE IN HOW IT CONDUCTS IT'S PUBLIC AFFAIRS.

GOOD MORNING FLINT! 06/15/12 
 
The P.A.4 is overreaching and must be defeated.  
 
The lighting special assessment hearing was improperly noticed and improperly conducted.  
 
Effective legal challenges are pending in Ingham County and Genesee County. Community/political leadership has woken up and fighting for our rights as citizens of this country, state, county and city. 
 
At the end of the day Flint is still 20 million dollars in debt, cannot manage its own affairs, is a creature of state government by the Home Rule Cities Act and an economic threat to taxpayers state wide.  
 
Our leaders past and present have mismanaged our affairs, demoralized the first responders we need for our public saftey.  
 
These leaders who have failed us are the current mayor and current city council. 
 
What will be different when Browns power is diminished or the emergency manager is gone? 
 
The political culture of Flint needs new blood , vision, leaders equipped for our challenges.  
 
How will we accomplish change?

Sphere: Related Content

FLINT MUST UNITE, EDUCATE AND MOBILIZE

GOOD MORNING FLINT! 06/14/12-

Flint is organizing its response to the SHOCK of the republican takeover of Flint.

 

There is hope. Leadership will emerge from this process.

Councilperson Delrico Lloyd and Chris Martin will one day assumed formal leadership status  My prediction.

The groups Purpose at the  Antioch meeting 06/13/12 was to Unite , Educate, and Mobilize. ROCK SOLID IN THEORY THE TEST IS THE APPLICATION.

I pledge my cooperation from my small perch, you should too.

EDUCATE-Gov. Snyder is exploiting the large scale shock or economic crisis by further restricting the funding to cities and crushing and setting aside their democratic leadership with a republican dictatorship governed by his cadre of emergency managers

. Our own Mayor Walling submitted to EM training/indoctrination. Amusing he is now silent.

What is really happening to our City of Flint.

The Govenors actions are about politics and power.

This Govenor could care less about our saftey and the education of our children.

Therefore we must, you must. The Govenor through his puppet managers is imposing a rapid fire transformation of Michigan cities.

What is really going on is an extreme republican makeover of our cities.

It is intentional that the speed, suddenness and scope of these economic and public policy decision making shifts will provoke a psychological reaction in Flint Citizens of numbness to facilitate adjustment.

This painful tactic has been coined the “shock treatment”

This is the republican policy altering method of choice.

[concepts applied from pg 8 "The Shock Doctrine"Klein]

For our own protection the Flint community must get its head right and respond by mantra of UNITE, EDUCATE, AND MOBILIZE.

 

We can succeed together or fail separately.

 

-TRB/06/14/12

see also
http://occupyflintlegal.wordpress.com/good-morning-flint/

Sphere: Related Content

CAN 1099 TAX OBLIGATION BE DISCHARGED IN BANKRUPTCY?

Will Bankruptcy stop a 1099-C?
Will Bankruptcy negate a 1099-C issued

When you stop paying commercial debts the creditor has the right to  file a  1099-C  for the cancellation or forgiveness of a debt. Bankruptcies are a special case and will stop the issuance of a 1099-C. The theory is that  the amount on a 1099-C represents taxable income to you, the prevention of a 1099-C is one of the added benefits of a bankruptcy discharge. [1]

TERRY BANKERT A FLINT BANKRUPTCVY LAWYER AND FAMILY LAW ATTORNEY 810-235-1970


Therefore If you receive a bankruptcy discharge, the prime benefit is that you do not have to pay your debts with  an added tax benefit of which many debtors are not even aware. The amount of the debt that you discharge in bankruptcy is specifically excluded from your gross income when you file your taxes. In other words discharged debt is not taxable.[1]

Form 1099-C

Form 1099-C is a form creditors use to inform debtors and the IRS of the amount of a cancelled or forgiven debt. While bankruptcy generally stops creditors from sending out this form, in some cases a creditor may send you a 1099-C that indicates the debt was discharged rather than forgiven.[1]

Form 982

Some creditors may send you a 1099-C without the box marked "bankruptcy" checked, even if your debt with them was included in your discharged bankruptcy. In this case, you must file Form 982 with the IRS to indicate that your debt is not taxable. Line 1a of Form 982 allows you to exclude the amount of the discharged debt by indicating that the amount represents indebtedness in a title 11 case. Title 11 simply refers to the section of the U.S. Code that describes bankruptcy, so you can include the amount here regardless of which chapter of bankruptcy you filed.[1]

Cancelled Debt

Do not confuse discharged debt with cancelled or forgiven debt. This is an important distinction because forgiven or cancelled debt is usually taxable. For example, if you negotiate your $100,000 credit card bill to $50,000, you will owe income tax on that forgiven $50,000. If you had instead filed bankruptcy, you probably could have discharged the entire $100,000 without paying tax on any of it.[1]

Debt Forgiveness Is a Taxable Event Pursuant to the Internal Revenue Code & Will Generate a 1099-C[4]
Adding taxable insult to catastrophic financial injury is the fact that “debt forgiveness” will generate a taxable event pursuant to the Internal Revenue Code, §61(a) (12) [Exhibit 1] which succinctly states:
“Gross Income Defined:
“Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:[4]
............
(12) Income from discharge of indebtedness.”
This “income from discharge of indebtedness” is routinely referred to in short form as “C.O.D. Income” — “Cancellation Of Debt” Income. The theory is that cancellation of debt is equivalent to either “an accession to wealth”[4] or a freeing of assets; money that would otherwise be used to pay off the debt is available to the taxpayer for whatever the taxpayer chooses.[5]
Particularly problematic is the fact that at the time the debt is “forgiven” there is no automatic generation of a 1099-C.  The “C” in the 1099-C refers to “Cancellation of Debt.
The notice from the financial institution may not arrive at the taxpayers (new) residence until January 31 of the following tax year![4]

A few words of caution: if the debt, or part of it, was canceled before you filed bankruptcy (through debt settlement or negotiation, for example), the creditor must issue the 1099-C unless another exception applies. And that debt is not included on Line 1a of Form 982, because it was not discharged in bankruptcy. As a result, even if you later file bankruptcy, you may owe tax on that debt cancellation income unless you were insolvent at the time you settled it.[3]

You do not owe taxes on 1099’s filed after a bankruptcy is filed. You may owe taxes on debts forgiven before a bankruptcy is filed.

Discharge of Debt in a Bankruptcy Is Not Taxable Income, But Will Apply to Reduce “Tax Attributes”[4]
The simple rule is that Debt discharged in a Bankruptcy case is not considered taxable income. However, the discharge of debt must be pursuant to a valid Court Order, or is incident to “Plan” approved by the Court.[4]
Notwithstanding the intuitive simplicity of the Bankruptcy exception, the IRS will apply the amount discharged in bankruptcy to what is calls “tax attributes”, and mandates the filing of Form 982  which is designed to make sure that there is no tax free windfall to the debtor. The presenter would describe “tax attributes” to be other tax advantages the taxpayer may have, which will be reduced to the extent of the Bankruptcy discharge, and include:

• Net Operating Loss
• General Business Credit Carryover
• Minimum Tax Credit
• Capital Loss
• Basis
• Passive Activity Loss
• Foreign Tax Credit

This is a complex and technical area, which the Family Law attorney or their client, wander at their own peril. This is a compelling reason to follow “Tax Tips Disclaimer—Part B” and retain a qualified C.P.A. to work through these issues on behalf of client.[4]


[1]
http://www.ehow.com/info_7987499_bankruptcy-stop-1099.html


[2]
http://www.ehow.com/info_8776946_got-can-still-sued-debt.html

[3]
http://www.bankruptcylawnetwork.com/in-bankruptcy-dont-fear-the-1099-c/

[4]
8th Anual Family Law Institute 11/12/09,Tax Tips for the Practitioner
By James J. Harrington, III, Law Offices of James J Harrington III PLC, Novi

Sphere: Related Content