SPOUSAL MAINTENANCE AND THE NEW TAX LAW

For many years, spousal maintenance (alimony) has been tax deductible for the person paying it and taxable income for the person receiving it. But that basic tenet of divorce no longer applies due to provisions in the GOP tax law. Here is a case which considers the new tax law effect on spousal maintenance and reduces the statutory guideline amount by 12%.

WISSEMAN v. WISSEMAN, 2019 NY Slip Op 29092 - NY: Supreme Court, Dutchess 2019:

"On March 6, 2019 a hearing was held. Prior to the hearing, the parties' attorneys represented that all issues were able to be resolved with the exception of the sum of maintenance. Although the parties had agreed that the husband would be obligated to pay maintenance to the wife for a period of two years they were unable to agree upon the sum. The parties' attorneys represented that the basis for the inability to agree was the change in the tax law effective this year pursuant to which maintenance is no longer tax deductible to the payor spouse, in this case, the husband, and no longer includable as taxable income to the payee spouse, in this case, the wife. The quandary is twofold. First, it is the husband's position that he should pay less maintenance since he cannot deduct the maintenance payment from his taxable income. Second, the question is how much less. The parties agree that the husband's federal tax rate is 22%. Therefore, he claims that an award of maintenance calculated by strict application of the maintenance statue (Domestic Relations Law §236B(6)) would be unjust and inappropriate and that his statutory calculation should be reduced by 22%. However, the parties agree that the wife's federal tax rate is 12%. She argues that strict application of the statutory formula is mandated, and that reduction of her award by 22% would result in even less of a net payment to her than would have resulted if she had to claim the maintenance as taxable income.
Counsel stipulated that based upon the husband's annual income of $70,800.00 and the wife's of $30,000.00, strict application of the statutory guidelines would require maintenance of $512.54 per month.

The original purpose of the tax law enabling the payor spouse to deduct maintenance from his or her taxable income was to leave more disposable income available to both parties. This was accomplished by the spouse in the higher income tax bracket taking the deduction and having the sum deducted includable as income to the spouse in the lower tax bracket. Now, more tax is paid and the spouses as a unit have less disposable income.

When deciding the issue of maintenance, the court must consider all of the factors set forth at Domestic Relations Law §236(B)(6). At bar, the parties agree that maintenance is due and only the sum is to be determined. Their incomes and income abilities have been agreed upon, as has been the duration of maintenance. Both parties have represented that the other factors have been considered, and agreed upon, with the exception of the tax consequences to each party. Based on those representations and those relevant factors, strict application of the maintenance guidelines would be unjust and inappropriate so as to warrant a deviation. Based upon all of the above, it is hereby

ORDERED that the husband shall pay maintenance to the wife in the sum of $451.04 per month. The statutory award is reduced by 12%, the net result of which is application of the guidelines as intended by the New York State Legislature prior to the federal change in the relevant tax law, impacted only by a reduction concomitant with the wife's tax bracket and what she would have been obligated to include as taxable income. Until this court is guided by a higher authority or legislative change it finds that such deviation under these circumstances is just and proper."

TAX BREAK ON MORTGAGE FORGIVENESS EXTENDED AND REVIVED

Generally, the tax law treats the forgiveness of debt as taxable income to the debtor. But as a wave of foreclosures followed the housing bust that began in 2006, Congress decided to cut some slack for homeowners who lost their homes. A new rule allowed up to $2 million of debt discharged by lenders in foreclosures or short sales, for example, to be excluded from income. That provision expired at the end of 2014, but it has now been revived retroactively to cover 2015 and extended for 2016, too. This break does not apply to the discharge of debt on second homes or rental property.

See  https://www.congress.gov/bill/114th-congress/house-bill/2029/text

NEW YORK MATRIMONIAL - SAME SEX COUPLES

Due to recent court decisions, it is now suggested that same-sex couples should consult with their tax attorney to see if they may qualify to file a “Protective Claim for Refund.”

More information can be found at this link:

JD SUPRA: Same-sex married couples: Consider filing a Protective Claim for Tax Refund NOW

UNEMPLOYMENT INSURANCE - TAXES

A common question: do I report it? A common answer: yes and file. Here is some information the the Department of Labor website:

"Q: Is there tax relief available for UI claimants?

A:  Yes. Under current legislation, the first $2400 of UI benefits paid in the year 2009 will be exempt from federal and state taxes.

Q: Will any benefits be withheld for taxes?

A:  The withholding of benefits for Federal income tax or State income tax is voluntary. If you elect to have Federal tax withheld, an amount equal to 10% of your gross benefit payment will be withheld after mandatory deductions, such as child support payments, are made. If you elect to have State tax withheld, an amount equal to 2.5% of your gross benefit payment will be withheld. You can change this option any time by calling the Telephone Claims Center toll-free number, selecting the option to ask a question about a claim you already filed, entering your SSN and PIN, and then selecting the option to begin or cancel the withholding of federal or state income tax.

Q: Can I change my tax withholding option?

A:  You may start or stop the federal or state tax withholding at any time by contacting the Telephone Claims Center and:
• Selecting option to "Ask a question about a claim you already filed," and
• Entering your Social Security number and PIN, and
• Selecting the option to begin or cancel the withholding of federal or state income tax.

If you elect the tax withholding option, you must have 10% withheld; you cannot have any less or any more than 10% withheld. If you elect the state tax withholding option, you must have 2.5% withheld; you cannot have any less or any more than 2.5% withheld.

Q: Can I have my tax withholding returned to me?

A:   Any benefits withheld cannot be returned to you by the Department of Labor; benefits withheld can only be returned to you by the Federal or State government as part of your income tax refund.

Q: Will I receive a year-end statement?

A:   Yes. During January, the Department of Labor sends out a Form 1099-G (Statement for Recipients of Certain Government Payments) to claimants who received unemployment insurance benefits during the previous calendar year. Because of this, it is important that you notify the Telephone Claims Center of your current address.

Please keep the Form 1099-G for your records. The information on your benefit statement is also sent to the Internal Revenue Service and the New York State Department of Taxation and Finance. Unemployment compensation includes: unemployment insurance payments; extended benefits and Federal Supplemental Compensation payments; Trade Adjustment Act (TAA) basic, retroactive, and additional for training payments; and Disaster Unemployment Assistance (DUA) payments. If you did not receive any unemployment compensation during the previous calendar year, but repaid an overpayment of benefits, the Form 1099-G is sent to you as the information may be helpful to you in filing your return.

If you received unemployment insurance benefits during the prior calendar year, and do not receive your Form 1099-G by February of this year, please contact the Department of Labor – Payment Unit at 518-485-7071, or you can request the 1099-G by mail. For a complete record of your UI payments, login on the Benefits Online Page and click on 'View Payment History'.

In addition to federal and state income tax, you are also responsible for New York City and Yonkers City income tax, if you are subject to them.

It may be necessary for you to make estimated tax payments to avoid a penalty for underpayment when you file your return next year. For more information on when you should make estimated federal tax payments, see IRS Publication 505, Tax Withholding and Estimated Tax, or the instructions for Form 1040-ES. For estimated state tax, use Form IT - 2105, Estimated Tax Payment Voucher. If you have any questions about estimated state tax payments, contact the NYS Department of Taxation and Finance at 1-800-225-5829. The withholding of 2.5% of your benefit amount for State income tax is voluntary.

The Internal Revenue Service is responsible for interpreting and applying the provisions of income tax laws. Any questions on federal taxes should be directed to the nearest Internal Revenue Service office. The New York State Department of Tax and Finance is responsible for interpreting and applying the provision of state income tax laws. Questions on state taxes should be referred to the NYS Department of Taxation and Finance.

Q: If I repaid an overpayment will it appear on my form 1099-G?

A: Yes, provided the repayment was received by the Department of Labor during that tax year. If you did not receive any unemployment compensation during the previous calendar year, but repaid an overpayment of benefits, the Form 1099-G is sent to you as the information may be helpful to you in filing your return. Please note that only cash repayments are reported on Form 1099-G. Benefits taken from your claim to repay an overpayment are not cash repayments and are not included in the form. "

UNEMPLOYMENT INSURANCE - OVERPAYMENTS

If you do do not repay your unemployment overpayments due to fraud, there is a tax effect. From the IRS website:

"Topic 203 - Failure to Pay Child Support, Federal Non–Tax Debts, State Income Tax Obligations and Unemployment Compensation Debts

The Department of Treasury's Financial Management Service (FMS), which issues IRS tax refunds, has been authorized by Congress to conduct the Treasury Offset Program. Through this program, your refund or overpayment may be reduced by FMS and offset to pay any past–due child support, Federal agency non–tax debts, state income tax obligations or certain unemployment compensation debts owed a state (namely debts for compensation that was paid due to fraud or for contributions due to a state fund that were not paid due to fraud).

You can contact the agency with which you have a debt, to determine if your debt was submitted for a tax refund offset. You may call FMS at the number below for an agency address and phone number. If your debt was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt and send it to the agency you owe. Any portion of your refund remaining after offset will be issued in a check to you or direct deposited for you.

FMS will send you a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund. Contact the agency shown on the notice if you believe you do not owe the debt or you are disputing the amount taken from your refund. If a notice is not received contact FMS at 800–304–3107 or TDD 866–297–0517. The available hours are Monday through Friday 7:30AM to 5:00PM CT. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation. Attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ or file it by itself after you are notified of an offset. If you file a Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A, or 1040EZ. IRS will process your allocation request before an offset occurs. If you file Form 8379 with your original return, it may take 11 weeks for Electronic Filed returns or up to 14 weeks from the date of filing if you file a paper return, to process your return."

UNEMPLOYMENT INSURANCE - TAX WITHOLDING

The NY State Department of Labor (DOL) has announced that claimants who are receiving NYS Unemployment Insurance (UI) Benefits can now voluntarily elect to have NY State Income Tax withheld from their UI benefit checks. Previously, only Federal Income Taxes could voluntarily be withheld.

Here are answers to FAQs from the NY State Department of Labor:

Are unemployment insurance benefits taxable?
Yes. Any unemployment compensation you receive is subject to Federal, New York State and Local income taxes provided you are required to file a tax return.

Is there tax relief available for UI claimants?
Yes. Under current legislation, the first $2400 of UI benefits paid in the year 2009 will be exempt from federal and state taxes.

Will any benefits be withheld for taxes? The withholding of benefits for Federal income tax or State income tax is voluntary. If you elect to have Federal tax withheld, an amount equal to 10% of your gross benefit payment will be withheld after mandatory deductions (such as child support payments), are made. If you elect to have State tax withheld, an amount equal to 2.5% of your gross benefit payment will be withheld. You can change this option any time by calling the Telephone Claims Center.

Can I change my tax withholding option?
You may start or stop the federal or state tax withholding at any time by contacting the Telephone Claims Center. If you are a new claimant, you can have opt for state income tax deductions at the time that you file online or by phone. If you have an open claim, then you would have to change your withholding options by calling the Telephone Claims Center.

Note: If you elect the Federal tax withholding option, you must have 10% withheld; you cannot have any less or any more than 10% withheld. If you elect the state tax withholding option, you must have 2.5% withheld; you cannot have any less or any more than 2.5% withheld.

MORTGAGE FORCLOSURE

So if you borrowed money on your home, and are involved in a short sale, load modification, extended payment, deed in lieu of foreclosure, etc., tax implications must also be considered. This is from the IRS web site: "If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you. Is Cancellation of Debt income always taxable? Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve: Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners. Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences. These exceptions are discussed in detail in Publication 4681."