Ex-Spouse Property Transfers Incident to Divorce | Tax Lawyer & Attorney

This article introduces a series of articles on 26 U.S.C. §1041 and specifically the issue of tax treatment of ex-spouse property transfers incident to divorce. As a result of a divorce, it is very common for ex-spouses to transfer properties to each other as part of their settlement agreement. A question arises: are these ex-spouse property transfers taxable?

Note that this article covers a situation only when both spouses are US citizens and only direct transfers between ex-spouses (i.e. the transfers on behalf of an ex-spouse are not covered here).

General Rule for Ex-Spouse Property Transfers under 26 U.S.C. §1041

A property transfer between spouses is generally not subject to federal income tax. 26 U.S.C. §1041(a)(1). Transfers of property between former spouses are also not taxable as long as they are “incident to divorce”. 26 U.S.C. §1041(a)(2). For income tax purposes, the law treats the transferee spouse as having acquired the transferred property by gift. 26 U.S.C. §1041(b)(1). This means that “the basis of the transferee in the property shall be the adjusted basis of the transferor”. 26 U.S.C. §1041(b)(2).

It is important to emphasize that only transfers of property (real, personal, tangible and/or intangible) are governed by 26 U.S.C. §1041; transfers of services are not subject to the rules of this section. Treas Reg §1.1041-1T(a), Q&A-4.

Ex-Spouse Property Transfers Incident to Divorce

The key issue for the ex-spouse property transfers is whether they are “incident to divorce”. The statute and the temporary Treasury regulations describe two situations when a transfer between ex-spouses will be considered “incident to divorce”: “(1) The transfer occurs not more than one year after the date on which the marriage ceases, or (2) the transfer is related to the cessation of the marriage.” Treas Reg §1.1041-1T(b), Q&A-6; 26 U.S.C. §1041(c).

Ex-Spouse Property Transfers Not More Than One Year After the Cessation of a Marriage

Any transfers of property between former spouses that occur not more than one year after the date on which the marriage ceases are subject to the nonrecognition rules of 26 U.S.C. §1041(a). This is case even if a transfer of property is not really related to the cessation of the marriage. Treas Reg § 1.1041-1T(b), Q&A-6.

Ex-Spouse Property Transfers Related to the Cessation of the Marriage

26 U.S.C. §1041 does not actually define the meaning of “transfers related to the cessation of the marriage”. Rather, the temporary Treasury regulations explain this term.

The temporary regulations establish a two-prong test that states that a transfer of property is treated as related to the cessation of the marriage if: (1) “the transfer is pursuant to a divorce or separation instrument, as defined in section 71(b)(2)”, and (2) “the transfer occurs not more than 6 years after the date on which the marriage ceases”. Treas Reg §1.1041-1T(b), Q&A-7. The definition of divorce or separation instrument in the first prong also includes a modification or amendment to such decree or instrument.

If either or both of the prongs of this test are not satisfied (for example, the transfer occurred more than six years after the cessation of the marriage), then a transfer “is presumed to be not related to the cessation of the marriage.” Id. This is a rebuttable presumption and, in a future article, I will discuss how a taxpayer may rebut this presumption.

Contact Sherayzen Law Office for Professional Help Concerning Tax Consequences of a Property Transfer to an Ex-Spouse

If you are engaged in a divorce or you are an attorney representing a person who is engaged in a divorce, contact Sherayzen Law Office for experienced help with respect to taxation of transfers of property to an ex-spouse as well as other tax consequences of a divorce proceeding.

Form 8889 for Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) were created in 2003 as a means of addressing increasing health care costs. HSAs give individuals enrolled in high-deductible health plans (HDHPs) tax-preferred treatment for money saved for medical expenses. In general, HSAs allow for individuals to defer taxes when money is contributed (even if a taxpayer does not itemize on Form 1040 Schedule A), and money that is eventually withdrawn and used to pay for qualified medical expenses is also usually tax-free.

In this article, we will explain the basics of Form 8889 for HSAs. This explanation is not intended to convey tax or legal advice. Please consult a tax attorney if you have further questions.

Form 8889

Form 8889 is used for all of the following purposes: to report health savings account (HSA) contributions (including those made on behalf of taxpayers, and employer contributions), to report distributions from HSAs, to calculate the correct HSA deduction amount, and to calculate the amounts that taxpayers must include in income and any additional tax that may be owed if a taxpayers fails to qualify as an eligible individual. The IRS defines an HSA as, “[A] health savings account set up exclusively for paying the qualified medical expenses of the account beneficiary or the account beneficiary’s spouse or dependents.” In general, distributions received from an HSA to pay for “qualified medical expenses” (see IRS publications for the specific definition) of an account beneficiary, a spouse, or dependents are excluded from the determination of gross income.

For the 2013 tax year, Form 8889 must be filed under any of the following circumstances: if a taxpayer (or somebody on behalf of a taxpayer, such as an employer) made contributions to an HSA in 2013, if HSA distributions were received in 2013 by a taxpayer, if a taxpayer failed to be deemed an eligible individual during the applicable testing period and certain amounts must therefore be included in the taxpayer’s income, or if an interest in an HSA was acquired due to the death of the account beneficiary. The testing period begins with the month a contribution to a qualified HSA is made, and ends on the last day of the twelfth month following that month.

Subject to certain exceptions, taxpayers who fail to remain eligible individuals must include the qualified HSA funding distribution in income in the year in which they do not meet the eligibility requirement, (and this amount is also subject to a 10% Additional Tax for Failure to Maintain HDHP Coverage).

HSA Deductions

In general, the maximum amount that one can contribute to a HSA plan is dependent upon the type of HDHP coverage that an individual has (For 2013 and 2014, HDHPs require minimum annual deductibles of at least $1,250 for individuals and $2,500 for families). For individuals who have self-coverage, the maximum contribution for 2013 is $3,250, and taxpayers with family coverage, the maximum amount that may be contributed is $6,450. (For 2014, the contribution limit is raised to $3,300 for individuals HSAs, and $6,550 for family HSAs). Individuals who are at least 55 years of age as of the end of their tax year may make an additional catch-up contribution of $1,000 (and this amount will be unchanged for 2014). The maximum HSA contribution amount, however, is reduced by any employer contributions to an HSA, and contributions made to an Archer MSA, and any qualified HSA funding distributions.

In addition, any contributions made to an HSA during the month in which a taxpayer was enrolled in Medicare will not be deductible. Further, HSA contributions are not deductible if a taxpayer can be claimed as a dependent on Form 1040 by somebody else.

Tax Year 2013 Changes to the Itemized Deduction for Medical and Dental Expenses

US taxpayers who itemize their deductions on Schedule A of Form 1040 should be aware that new IRS rules are in effect for 2013 tax returns to be filed in 2014. Under the new rules, the threshold for unreimbursed medical and dental expenses paid by taxpayers for themselves, spouses or dependents have increased for most individuals.

This article will briefly explain the change in the rules; it is not intended to convey tax or legal advice. Please consult a tax attorney if you have further questions. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs.

Taxpayers under the Age of 65 in 2014

For married couples, with both spouses under the age of 65, unreimbursed medical and dental expenses will now only be deductible provided that they exceed 10 percent of the couple’s adjusted gross income (AGI) from Form 1040, line 38.

Taxpayers over the Age of 65 in 2014

For taxpayers over the age of 65, or a married couple with one spouse over the age of 65, the existing 7.5 percent threshold is still in effect for tax year 2013. Note however, that the exemption will only apply to tax years beginning after December 31, 2012, and ending before January 1, 2017, if a spouse attained age 65 during or before the tax year.

Taxpayers Turning 65 in 2014

For taxpayers who turn 65 in the year 2014, (assuming they are not married to a spouse who is already 65), the 10 percent threshold should be used for calculating allowable medical and dental expenses for their 2013 tax returns. When such taxpayers turn 65 years old in 2014, the 7.5 percent threshold may then be used for filing the next year’s tax return. (Further, as noted above, beginning with the tax year 2017 return and years following, the 10 percent threshold must be used).

Taking the Medical and Dental Expenses Deduction

Generally, taxpayers may deduct medical and dental expenses paid for themselves, their spouses and their dependents. (See IRS Publication 502, “Medical and Dental Expenses” for more information). Taxpayers should keep sufficient records for each medical expense consisting of amount and date of each payment, and the name and address of each medical care provider that received payment. Also, taxpayers are advised to keep statements and/or invoices showing who received medical treatment for the claimed expense, a description of the type of medical care received, and the nature and purpose of all medical expenses.

According to the IRS, “Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness.” Such expenses generally include, “[P]ayments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.” Accordingly, expenses that are “merely beneficial to general health, such as vitamins or a vacation” (as well as expenses such as teeth whitening, health club dues, and cosmetic surgery) are not deductible.

Contact Sherayzen Law Office for Help With Your Tax and Estate Planning

As the new tax law changes are being implemented in 2013 and subsequent years, the necessity for proper tax planning will only increase with each year. Such planning should be conducted by an experienced tax attorney. This is why you are advised to contact the experienced tax law firm of Sherayzen Law Office to help you create a thorough tax plan aimed at taking advantages of the various provisions of the U.S. tax code.

Tax Lawyers Minneapolis: Preparing for Initial Consultation I (for Individuals)

A little disclaimer first: this article is concerned only with individuals contacting Minneapolis tax lawyers for a consultation. I will discuss preparation of business owners for an initial tax consultation in another article.

There are two sides to your preparation for the initial consultation with your Minneapolis tax lawyer. First, the information you need to supply to your tax attorney. Second, the questions you want to ask your tax lawyer. This essay deals with the first part of the preparation.

It is important to understand that your Minneapolis tax attorney will initially have to rely almost exclusively on the information that you supply to him. Moreover, failure to supply the necessary information during initial consultation may lead to significant delays in your case and increase your legal expenses. This is why it is very important to come prepared to the initial interview.

Below, you will find a number of suggestions about how to prepare for the initial consultation with your Minneapolis tax attorney. These suggestions come from my personal experience when I had to advice my clients on what to bring with them to the interview in order to maximize the efficiency of the case and my ability to provide sound tax advice.

The first step is to ask your tax attorney about what you should bring with you. The most common response is that you should bring all documents that are related to your case. Usually, however, I would list specific documents which are customary in a given tax situation. Unfortunately, I have found that a lot of clients, for various reasons, are not willing to bring many of these documents but only what they think a Minneapolis tax lawyer needs. Later on, this usually leads to repetitive documentary requests by a tax attorney from his clients.

“Everything related to the case” usually includes all official documents, accounting documents, e-mails, letters, corporate tax documents, et cetera. Sometimes, this would mean divulging sensitive financial information. For example, if you have foreign bank accounts and you are retaining your attorney to help resolve an FBAR issue, then these bank accounts will need to be submitted to your tax lawyer as well.

The next step is for you to review what documents you actually have. The exact list of documents may differ depending on your particular situation; however, here is a non-exclusive list of the most usual documents you need to bring to your tax attorney:

a) Tax returns: copies of your tax returns, usually going back three tax years. Your tax attorney, however, may advise you to bring tax returns for the past six years in certain situation;
b) Supporting documentation for tax returns (including deductions and credits): usually, you do not have to provide it for the initial interview unless this is relevant to your case (for example, you are contacting a tax attorney to file a tax return);
c) Housing documents: this issue usually comes up with respect to claiming first-time homebuyer tax credit or for tax planning purposes.
d) IRS correspondence: all relevant IRS correspondence should be provided to your tax lawyer;
e) Your correspondence: letters, e-mails, faxes, et cetera if they are relevant to your case;
f) Business/Investment documentation: I discuss preparation for a business-related tax consultation in another article, but it is important to mention here that if your individual tax issue is related to your business or investment activities, then you should bring relevant business documents (incorporation documents, business structure documentation, business tax I.D. number, et cetera);
g) Any other documents relevant to your case: if there is anything else that you think is relevant to your case, then bring it with you. I once had a client who brought carton boxes with unique ID numbers on them.

The third step is to find out what information you are missing. Compare the information you obtained from the second step with the list of documents your attorney provided and what you think is relevant to the case. Identify the documents that are missing and try to obtain the missing information before meeting with your tax attorney. If this is not possible, then let your attorney know during the consultation what information you are missing and whether you will be able to find it after the meeting.

Once you go through these three steps, the first part of the your preparation for the initial tax consultation is finished. I will discuss the second part of your preparation in the next article.

Remember, Sherayzen Law Office can help you with your tax issues, whether you want to check your tax return, negotiate with the IRS, or engage in complex tax planning.

Contact Sherayzen Law Office NOW to discuss your tax case with an experienced tax attorney!