Tax Update for Family Law Attorneys

Tax Update for Family Law Attorneys

By Ron J. Anfuso

Topic: Spousal Support and IRC Section 15051

Skye Group Meeting, October 18, 2018

 

This is the third time I have presented on this topic. (South Bay Bar, Long Beach Study Group & Skye Group in Rancho Cucamonga)

I was contacted today by CA State Bar Association and have agreed to do a Moore/Morspen ETAL Webinar in Jan 2019.

the phantom returns

The Phantom Returns

White, Zuckerman, Warsavsky, Luna and Hunt South Bay Study Group: The Phantom Returns

Presented by: Warren Sacks, Wendy S. Jones and Philip M. Daigneault

Phantom Income, Balance Sheet Issues IRMO Finby and the Tangled Web Financial Consultants Cases Create

April 17, 2017, 5:30pm – 7:30pm

This presentation covered how to value investment advisors / financial advisors and various legal and financial issues regarding transition bonuses as well as performance bonuses for division of assets as well as spousal and child support.

“Where Death and Divorce Collide: A Few Things Trust and Estate Lawyers Need to Know about Family Law.”

Torrance, California, September 14, 2016

Christopher Moore, a member of A Better Divorce, a collaborative law group based in the south bay area of Los Angeles County, California, will address the Central Arizona Estate Planning Council in Phoenix, Arizona, on October 3, 2016. The topic will be “Where Death and Divorce Collide: A Few Things Trust and Estate Lawyers Need to Know about Family Law.”

Collaborative Divorce

Planning Opportunities

This is the forth in a multi-part series by Christopher M. MooreRead Part 1 (PENALTY-FREE DISTRIBUTIONS FROM RETIREMENT PLANS BEFORE AGE 59½ : A WINDOW OF OPPORTUNITY),  Part 2 (Retirement Plan Interests as Community Property) and Part 3 (Taxation of Retirement Plan Withdrawals)

Planning Opportunities

The two common opportunities for planning afforded by Code §72(t) are those relating to distribution pursuant to a QDRO and periodic distributions from an IRA. Any amount may be distributed in a lump sum directly from a qualified retirement plan (other than an IRA) to the non-employee spouse before age 59½, without imposition of the penalty tax. Where an IRA is involved, the benefits may still be withdrawn as periodic payments under Code 872(t,)(2)(A)(iv).

Where the retirement plan in question is something other than an IRA, therefore, the non-employee spouse may receive part or all of his or her share in a lump sum. if that option is available under the plan, at ordinary Income tax rates, without the imposition of the 10 percent penalty tax. even if the recipient spouse is under age 59½, This can be a source of cash for the purchase of a residence or other assets.

Where the retirement plan in question is an IRA or the plan proceeds have already been rolled into an IRA, the spouse still has the opportunity to receive periodic payments free of the additional tax. These payments will vary depending on the age of the spouse and may require an actuary to calculate them, but there is some flexibility in setting periodic distributions so that greater or lesser amounts may be taken if desired. Once periodic payments are begun, they may apparently be later changed or stopped. Because only periodic payments may be made from IRA’s and lump-sum withdrawals may be made from other retirement plans, any decision as to a lump-sum distribution should be made before rolling the non-participant spouse’s interest into an IRA.

The opportunity to withdraw retirement plan benefits without penalty appears particularly attractive with today’s relatively flat tax rates, which may make it possible to withdraw large amounts from a plan during a particular year at ordinary income tax rates without increasing the tax rates.

The availability of retirement plan funds without penalty increases the options available to the parties and also, of course, creates new arguments for the parties. The spouse who is still working and not receiving benefits from the plan, for example, may argue that the ability to reach retirement plan benefits without penalty should be considered as a basis for reduced support to the non-participant spouse.

The exceptions discussed above will not apply to every case, and in many cases where they do apply, the parties may decide not to take early distributions. Distributions, once taken, are still taxable, and there is a strong inducement to allow assets, whenever possible, to remain in the plan to grow and compound at tax-deferred rates.

Whatever the facts of a particular case, however, if there are retirement plan interests and either spouse is under age 59½ counsel may wish to consider taking advantage of the window of opportunity afforded by the exceptions to the penalty tax on premature distributions found in Code §72(t).

Chris-Moore2Christopher M. Moore is a certified family law specialist, a fellow of the American Academy of Matrimonial Lawyers and a member of A Better Divorce, having specialized in family law for many years. Those years as a litigator have taught him that Collaborative Practice is the best way to resolve a divorce. A collaborative case is always faster, costs less and is less stressful than a conventional case where the parties face court congestion, delays and an adversarial, often hostile, relationship. Click here for more information about Chris and his firm.

Taxation of Retirement Plan Withdrawals

This is the third in a multi-part series by Christopher M. MooreRead Part 1 (PENALTY-FREE DISTRIBUTIONS FROM RETIREMENT PLANS BEFORE AGE 59½ : A WINDOW OF OPPORTUNITY) and Part 2 (Retirement Plan Interests as Community Property)

The rules governing the taxation of retirement plan withdrawals may be summarized as follows:

  1. All such withdrawals are ordinary income for federal and state income tax purposes.
  2. An “additional” or penalty tax of 10 percent applies to distributions from qualified retirement plans to recipients under age 59½. Internal Revenue Code §72(t).
  3. The combined state and federal income tax, taking into account the deductibility of state income tax on the federal return, is approximately 34.8 percent in California. When the 10 percent penalty tax is added, the effective combined rate approaches 45 percent. In cases where the marginal federal tax rate is 33 percent rather than 28 percent, the combined tax rate, including the penalty tax, can approach 50 percent, The penalty tax, which is not deductible on either the federal or state tax return, can make withdrawals before age 59½ prohibitively expensive.

Fortunately, Code §72(t) contains two little-known exceptions to the application of the penalty tax which may provide relief to the party who finds it necessary to make a premature distribution from a retirement plan in connection with a marital dissolution proceeding.

Code §72(5)(1) actually provides five exceptions to the general rule that if any taxpayer receives any amount from a qualified retirement plan, the penalty tax shall be imposed:

  1. Distributions made after the distributee attains age 59½ Code §72(5)(2)(A)(i).
  2. A series of substantially equal periodic payments made at least annually for the life or life expectancy of the distributee. Code §72(t)(2)(A)(iv).
  3. Distributions which do not exceed the allowable deduction for the distributee’s medical expenses under Internal Revenue Code §213. Code §72(t)(2)(B).
  4. Certain distributions from ESOP’s. Code §72(t)(2) (C).
  5. Any distribution to an alternate payee pursuant to a QDRO. This exception, however, does not apply to distributions from an IRA. Subsection (3)(B) of Code §72(t) provides that periodic payments from qualified plans must begin after separation.

Next Week: Planning Opportunities

Chris-Moore2Christopher M. Moore is a certified family law specialist, a fellow of the American Academy of Matrimonial Lawyers and a member of A Better Divorce, having specialized in family law for many years. Those years as a litigator have taught him that Collaborative Practice is the best way to resolve a divorce. A collaborative case is always faster, costs less and is less stressful than a conventional case where the parties face court congestion, delays and an adversarial, often hostile, relationship. Click here for more information about Chris and his firm.