Recent Posts in Tax Issues Category

Q.  I'm separated from my ex-husband, and we are in the process of a divorce. He has asked me to file jointly on a 2010 return, and I am wondering if this is a good idea. Any suggestions?

Trudy

Q.     The district attorney's office intercepted our tax refund to pay past due child support.  If we divorce do I get any of this money back?

Q.  I remarried in August, 2009, and my new wife is a doctor.  She has one child from her prior marriage and I have two.  I am still paying my former wife alimony and child support even though the kids we have together live at our home 40% of the time.  I have been hit hard by the economy and we largely depend upon my wife's medical income to make ends meet.  Now my ex is threatening to take me back to court to increase my support based upon my new wife's income, while my own income is down from when the court last decided it.  My new wife is upset at the idea that my ex can learn anything about the medical practice or income.  What should I do?

A.  If there has been a material decrease in your income since the time of your last order, you may safely file a support modification motion to lower your child support and to lower or possibly terminate your spousal support.  Whether that is advisable based upon your numbers has nothing to do with your new mate's income, and should not cause you to hesitate - but again, it does depend on the actual respective numbers between you and Wife 1, which you did not provide me.  You also need not worry about W1 filing a motion to increase (you can't stop her, but she will not win based on W2's earnings).  Maybe you should give her this link so she will think twice.

California law is quite clear that new mate income cannot generally be considered against you in ordering or modifying child or spousal support.  The controlling California Family statute is section 4057.5.

In the normal situation, Family Code section 4057.5 leaves the Court no discretion to consider your new wife's earnings, period.  You do not need to report those earnings on your FL-150 (Income and Expense Declaration). This is a statement of California legislative policy effective in 1993 when this section was added to the Family Code.  This is true for both spousal and child support.

However, section 4057.5 does contain an exception for the "extraordinary case" which the statute makes clear is intended to address situations where "where excluding that income would lead to extreme and severe hardship to any child subject to the child support award" or where "a parent ... voluntarily or intentionally quits work or reduces income, or who intentionally remains unemployed or underemployed and relies on a subsequent spouse's income."  Even if the court were to find a severe hardship on the children of marriage number one, it would be required not to impose a severe hardship on your wife's child by reallocating her income to you for purposes of supporting your two children. 

In practice, so far, Courts almost never find facts sufficient overcome this clear statutory prohibition.  So far there is no published California appellate decision defining these extraordinary circumstances.  No doubt one day someone will so abuse this protection and hide behind it that we will get a reported decision that fleshs out how bad someone needs to behave before the protection is lost.  But "extraordinary" means really extraordinary.  In the average case, your new Wife has nothing to be concerned about. 

With regard to attorneys fee awards, however, there is authority for an argument that new mate income may be considered in granting or denying an attorney fee request, but the odds are against a judge doing that.

Incidentally, this section also applies to income from nonmarital partners as well as new spouses.  In one reported case (IRMO Loh), a trial court was reversed for inceasing dad's child support obligation after the mother produced photos of the father's "lifetyle" to show imputed nontaxable income in the form of his new girlfriend's contributions to him, since she paid for all his toys. 

The new mate question is a subset of the "imputed income" situations where a father or mother may quit work or reduce hours because they are relying on their new mate to contribute the difference.  That is not likely going to be an extraordinary case, but  W1 can separately seek to impute income to you on the basis that you have a higher earning capacity than you are exercising.  Earning capacity and imputed income is a blog for another day.  Also, I will mention here that another argument exists in favor of W1 that has nothing to do with the right to obtain the records or income of W2:  Equalizing the lifestyle's of the two households where yours is rich and grandiose and W1 is impoverished (an extreme example) pursuant to FC section 4057(b)(4).

The tax returns are privileged as they relate to your new wife's medical practice.  For instance, if she is a medical corporation (which I recommend be set up), she will almost never be forced to divulge those records.  Even as to your joint returns, you may be entitled to redact the information concerning your new spouse or have the Court review them in camera (meaning they are not turned over to the other side).  Your former mate is entitled to see your side of the tax returns, however, and they are not insulated from scrutiny simply because you filed joint with the Doctor Wife.  If you don't file jointly, your former wife will almost certainly never get her hands on your new wife's Married Filing Separately (MFS) returns.  Structuring things this way may or may not be advisable and you should consult a tax accountant.

An interesting twist here is that because you marry a higher, wealthy earner, your taxes actually increase because under federal IRS (and the California FTB), you are responsible for one-half of your new mate's income - and this is true even if you don't file jointly.  One case (County of Tulare vs. Campbell) has held that this additional tax you become liable for can form the basis for a reduction in your support because you have less net income available for support after the tax hit is deducted.  Hence, based on these tax consequences you may have an additional argument for decreased support - although a Court may try to deny you some discretionary offset to even the score since this feels a bit unfair to the spouse who is  primarily supporting the children and so lessen the downward modification.

The take-away:  So long as you are not playing games, have not intentionally reduced your income by relying upon your new mate's income, and there is no really extraordinary difference in the two households, your new wife's income is just not relevant and so it is protected.

The Tax Court rules that noncustodial father is not entitled to claim dependency exemption because custodial-parent M failed to complete Form 8332 releasing exemption and disso judgment, which father attached to return, does not contain substantially same information.

This is a really common situation, where a parent wrongfully claims a child or children on their tax return despite the fact the other parent is entitled to it that year according to the terms of a Judgment or Order.  It holds that despite the language of a Judgment, without Form 8332 signed and attached to the return, the IRS will not recognize the deduction. 

You still have your claims against the other parent, however, but now you have avoidable attorney fees or must waste your own valuable time enforcing your rights.

Click here to download IRS Form 8332.

TWA

Thomas v. Commissioner [full text] (1/19/10) TCM 2010-11, No. 17922-08 (Vasquez) 2010 WL 174107. When Arizona resident (F) was divorced from M in 6/94, their disso judgment awarded custody of their 3-year-old daughter (C) to M; F was awarded 30 days of visitation in summer, plus reasonable visitation in C’s state of residence. F was also ordered to pay child support of $400/mo through AZ T/CT. Disso judgment further provided that M would claim dependency exemption and child tax credit for tax year 1995 and succeeding odd-numbered years, while F would claim exemption and credit in even-numbered years if he was current in his child-support payments. M was required to execute necessary forms to permit F to claim exemption and credit, but only if F’s child-support payments were not in arrears.

In 2006, F was not delinquent in his child-support payments for C, who lived with M in Ohio. On his 2006 federal income tax return, prepared by CPA, F claimed dependency exemption and child care credit, but CPA subsequently notified him that his return was rejected from electronic filing because someone else claimed dependency exemption. CPA then filed F’s paper return, to which F attached copy of disso judgment, but not IRS Form 8332 exemption release. IRS sent deficiency notice to F, claiming that he was not entitled to claim either dependency exemption or child tax credit. F then petitioned U.S. Tax Court for relief, but TAX COURT RULES FOR IRS. Tax Ct finds that (1) per IRC §152(e), F, as non-custodial parent, was not entitled to claim dependency exemption unless (a) C received more than half of her support from M and F, (b) M and F were divorced, separated, or living separate and apart for last 6 mos. of 2006, (c) C was in custody of either M or F more than half of 2006, and (d) M, as custodial parent, released dependency exemption and F attached Form 8332 release or document conforming to its substance to his return ; (2) F could meet conditions (a), (b), and (c), but not (d); (3) disso judgment did not qualify as conforming document because it lacked Social Security numbers for M and F, M’s signature was not dated, and release of exemption was conditioned on F’s being current with child-support payments; (4) F could not claim dependency exemption; and (5) F’s being unable to claim dependency exemption meant that he was also ineligible to claim child tax credit. Tax Ct concludes that although it is sympathetic to F’s predicament, it is bound by statutes and regs as written.

Q.  My ex wife, who is getting child support from me, has twice claimed our daughter on our taxes. We are supposed to alternate each year.  I took her back to Court, and the Judge ordered that I get to alternate with her.  She keeps filing.  What can I do?

Q.  How are Social Securities Benefits Divided in Divorce?

A.  The Social Security Act of 1935, which as been amended numerous times over the years, is governed solely by the federal law.  States are powerless to effect changes in its rules and procedures.  Social Security benefits are not actually divided in divorce, and California courts do not divide social security rights.  They are not the subject of divorce settlements.  Social security benefits are considered the separate the property of the contributing spouse.  This is odd, since all other retirement plans are considered as part of the marital estate.  Government employees do not contribute to Social Security.  It is wasteful because, as discussed below, multiple former spouses can collect benefits on the same worker's history.  It is unfair because gays and lesbians who are domestic partners under state law gain no rights in the other's work history.

A spouse of a retired or disabled worker is entitled to derivative social security benefits IF the marriage was at least 10 years in duration.  This is defined as the period between the date of marriage and the date of termination of marital status.  It has nothing to do with periods of physical separation, and is not affected by a decree of legal separation.  It has nothing to do with the filing of a divorce itself.

The Social Security Act originally only covered certain job categories which reinforced traditional stereotyped views of family systems. Women generally qualified for insurance only through their husbands or children.  Amendments in 1939 added women, who became eligible to collect on their own earnings' record and became entitled to collect that or 50% of their husband's.  It was not until 1950 that benefits were extended to former spouses with children.  In 1965, former spouses without children were added but they had to have been married at least 20  years.  In 1977 this time period was reduced to 10 years.

Former spouses married for at least 10 years are now entitled to receive 50% of the Social Security beneficiary's benefits (as either derivative or dependent benefits) without reducing the worker's 100% benefit - in order words, in divorce the working spouse who contributed does not divide or share their retirement benefits and so the derivative benefits for former spouses do not cost either spouse.  They certainly, however, cost the taxpayers.  If the worker spouse dies, a former spouse(s) receives 100% of the benefits of the worker as a surviving former spouse.

This has many strange consequences.  One is that since spouses and state courts cannot divide the benefits, and it costs the working former spouse nothing to allow the other spouse to claim these benefits.  Imagine what hardship this might cause to a spouse whose marriage is terminated 9 years, 11 months, and 355 days after the date of marriage.  They would receive no derivative benefits, period.  It would cost the worker spouse nothing to delay dissolving the marriage one more day.  Many spouses who anticipate a future divorce strategically hold off filing until they are assured this time has passed or will pass, for good reason.  In California marital status cannot be terminated earlier than 6 months after the dissolution is filed and served.  I always alert clients to this area of the law, and have many times recommended patience; it would be attorney malpractice not to.  Sometimes raging working spouses want an earlier divorce just to deprive the other of this benefit.  This can be most unfortunate and downright ugly.  There is a procedure in California for dissolving marital status before a divorce case is completely finished (e.g., where property rights have not been determined) called bifurcation of marital status.  Sometimes a spouse wishes to get divorced immediately so that they can remarry, and this can interrupt the 10 years if the Court approves it.  Courts can order that the bifurcating party indemnify the other out of their own pocket for the loss of benefits, but as a practical matter there is no way for this indemnification to occur.  

Another consequence illustrates a major waste within the Social Security system.  Imagine that Fred marries Nancy the homemaker when they are 19.  After 10 years, they divorce. and Fred marries Jennifer.  After 10 years he moves on, dissolving that marriage and marrying Diane next.  He is now 49 years of age.  With his record, he still may have a couple of more marriages in him.  At this point, assuming that none of these three women have remarried or that they remarry after age 60 (a new marriage before age 60 terminates the right to derivative benefits), each of them are eligible to receive 50% of Fred's benefits while he continues to be entitled to 100%.  This means that 250% worth of benefits will be paid upon Fred's earning history alone.  Even better, if Fred dies before them, each ex-wife is thereupon entitled to receive Fred's 100% - which means 300% will be paid out and, since Fred is a serial monogamist, he will probably leave a widow (Tara) who likewise receives 100%.

Also, note the risks to the women.  If Nancy or Jennifer remarry before age 60 they lose any claims to the benefits generated by Fred and the count begins at zero with their new spouse and are based on the new spouse's earnings record with Social Security (assuming this person is not a government worker).  If their new marriage does not make the 10 year mark, they receive nothing from Social Security from either spouse.  This makes you want to reconsider a second marriage doesn't it - at least if you are a non wage earning wife!  Of course, few people ever think about this because they don't know about it; this is one goal of my website as an informational tool.

California has two state pension plans for government workers which exist outside of Social Security.  These are the Public Employees' Retirement System (PERS) and the California State Teachers' Retirement System (CalSTRS).  There are a number of city and county pension plans.  California teachers, state public safety officers (police and firefighters), and other workers who don't pay into the retirement portion of the Federal Insurance Contributions Act (FICA), do not receive social security benefits once they retire. 

They only may be eligible for some SS benefits based upon their spouse's record or their own earnings from private sector jobs.  However, even these benefits may be reduced under the Windful Elimination Provision (WEP) or the Government Pension Offset (GPO).  These are complicated rules and formulas which are beyond the scope of this answer. 

Q.  How is temporary spousal support calculated in California?

A.  In order to be entitled to spousal support, parties must be married or be registered domestic partners.  Spousal support (which is not usually referred to as "alimony" in California) is available in dissolution proceedings, actions for legal separation, and in connection with domestic violence applications. 

Spousal support orders may be temporary, or they be what is called permanent.  Different rules apply to how temporary support is figured than to permanent or long-term support.  I address permanent spousal separately.

Temporary spousal support is designed to preserve the status quo pending a final judgment.  Family Code section 3600 provides that during the pendency for dissolution of marriage or legal separation or in any proceeding where there is at issue the support of a minor child, the court may order the husband or wife to pay any amount that is necessary for the support of the husband and wife (subject to limitations contained in FC section 4320 and FC section 4325).  Again, parties dissolving domestic partnerships may also be awarded support.

Temporary spousal support has nothing to do with the length of the marriage.  Courts look at what the spending pattern was pre-separation and issues a spousal support award based upon need.  If there isn't enough money on the basis of need, then an amount is ordered based upon the higher earner's ability to pay.  A party seeking spousal support isn't deprived on the right to receive support even if they have income - the question is the relative income circumstances of the two parties.

Most California counties have formulas that determine temporary spousal support, but the two most important are Santa Clara and Alameda counties.  Essentially the spousal support formula for Santa Clara County - which is the dominant one - is as follows:  From any amount which is not allocated to child support, take 40% from the net income of the payor spouse, less 50% from the net income of the recipient spouse.  The resulting number is the temporary spousal support.  You do not need to have children to be entitled to receive spousal support.

As a practical matter, courts typically use one of two computer programs that generate these numbers:  Either the Dissomaster or Xspouse.  The Indio courts use Xspouse and the Santa Clara guidelines.

Into one of these programs are inputted the respective gross incomes of the parties.  If there are children of the parties, the custodial timeshare in percentages is inputted (because only a party who has physical custody for more than 50% of the year can claim the tax benefits of HH/MLA or head of household status, the programs require one to be considered to have 51% even in true joint custody arrangements). 

Only certain expenses matter for purposes of temporary support in California.  What doesn't matter at all is most personal expenses (like mortgage payments, utilities, debt).  This effectively ignores the entire debt structure of the parties at time of separation.  Health insurance, union dues, and mandatory contributions to retirement (i.e., typically not IRA contributions), and obligations existing to other minor children living in one party's home, or as to which an actual court order requires they make support payments, are also entered.  The support program 'tax effects' these numbers and figures out the net incomes of the parties.  It renders a number that tells the Court how much the higher earning spouse must pay for purposes of a court order.

Since the court determines the support obligation some weeks after a request for support is made (by way of Motion for Order to Show Cause application), it typically makes the support order retroactive to the date of the filing for the request.  Most courts order support payable one-half on the first and fifteenth of the month.  For this reason, if you file for support on the 5th day of the month, the court will not make support retroactive to the 1st but will start of the obligation on the 15th day of the month.

This might sound like temporary spousal support is easy to fix and who needs a lawyer?  This is not at all the case.  The final support numbers depend upon how much income the Court is attributing to each party.  Each is required to submit before the hearing an FL-150 Income and Expense Declaration.

For instance:  A husband's (and wife's) income numbers are usually but not always based upon historical earnings, and the California judicial council form (FL-150) requires both to set forth there total gross for the past 12 months and also the past month.  The legal assumption is that historical earnings are a reliable guide to future earnings, but this may not be at all true.  Especially in today's economy, historical earnings may not be indicative of what the income stream will be going forward.  This information needs to be credibly presented to the Court.

In cases where one party is a self-employed spouse, their net pre-tax earnings must be determined after deducting business expenses.  This is a common and complex area of dispute, because what is deductible for purposes of Schedule C accompanying a tax return according to the federal government is in no way binding upon California courts for purposes of figuring support.  If somebody works from home and charges part of the mortgage expense as a business deduction, that expense may be added back into the income stream as being available for support.

Another support battleground often involves imputed income.  What if one party refuses to work, or insists on working at a lower paying job?  Perhaps a support recipient believes they will get more money from their spouse if they have no job but if they tried to get one, they could?  What if one party claims that they aren't working and that no jobs are available?  Imputing income cuts both ways, and is extremely sophisticated. I will address another blog to it.

Incidentally, while only temporary alimony is calculated in this way, child support is always figured in this manner regardless whether there is a spousal support obligation.