The American College: HS 321 Income Taxation

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The American College HS 321Income Taxation

• Class 3 Chapter 5
• Gross Income Inclusions

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Objectives

• Explain the tax treatment of
• Payments in connection with separation or divorce
• Annuities
• Employee group life insurance

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Payments in Connection with Separation or Divorce
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Alimony

• General rule
• Deduct alimony paid from income of payor.
• Include alimony received in income of recipient.

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Current Alimony Rules

• To be alimony five tests must be met
• Must be cash payment.
• Payments must be required under a written decree
  or separate maintenance agreement.
• Payments must cease with death of recipient.

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Current Alimony Rules

• To be alimony five tests must be met
• Alimony payments cannot be designated for support
  of children or contingent on them.
• HW cannot file MFJ.

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Current Alimony Rules

• HW can specify in the decree that amounts
  transferred are not to be considered alimony.
• A payment isnt treated as alimony unless child
  support payments are current (paid-up).

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Example

• Alimony specified at 500/month child support of
  600/month, but due first day of the month.
  Paying spouse loses job and misses the Oct.,
  Nov., and Dec. payments. Payer resumes payments
  on Jan. 1.

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Example

• Child support in arrears
• 3 x 600 1,800
• Child support payments must be current before the
  TP gets a deduction for payment of alimony.

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Example

• Total Child
  Support Alimony Paid Due
  Deemed Paid Paid
• 1/1 1,100 2,400 1,100 0
• 2/1 1,100 1,900 1,100 0
• 3/1 1,100 1,400 1,100 0
• 4/1 1,100 900 900 200
• 5/1 1,100 600 600 500

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Quiz Questions
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Short Quiz 1

• Payments of alimony may be made in either
  property or cash.
• True
• False

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Alimony vs. Child Support
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Tax Consequences of Alimony of Child Support

• Problem of distinguishing between alimony and
  child support
• Sometimes these are not separately stated.

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Tax Consequences of Alimony of Child Support

• To be child support, payments must be
• fixed in amount, or contingent on the childs
  status, and
• paid solely for support of children, and
• paid under a decree or written agreement

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Alimony vs. Property Settlement

• The problem of distinguishing a property
  settlement from alimony
• Conceptual difference Alimony is for maintenance
  of life property settlement is a division of
  property.

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Alimony vs. Property Settlement

• Alimony has current tax effects a property
  settlement does not
• Disguising property settlements as alimony may
  produce tax advantages for some TPs.

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Alimony vs. Property Settlement

• To reduce game playing, recapture of excess
  alimony is required
• Pre-1985 divorcesno recapture required
• 1985?1986 divorces have complex recapture rules
  with 5-year lookback
• 1987?present divorces have somewhat simplified
  recapture rules with 3-year lookback

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Quiz Questions
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Short Quiz 2

• The value of rent-free occupancy of a home by
  the former spouse and children of the taxpayer is
  deductible by the taxpayer as alimony and taxable
  to the former spouse as income.
• True
• False

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Short Quiz 2

• Payments to a former spouse are generally
  treated as child support for tax purposes to the
  extent the divorce or separation agreement
  designates them as such.
• True
• False

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Alimony vs. Property Settlement

• Requiring alimony to be only cash payments
  reduces game playing also.

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Income Taxation of Annuities
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Inclusions

• Annuities Commercial
• Exclusion Ratio (key!)

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Other Issues Regarding Annuities
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Inclusions

• Annuities Commercial
• Exclusion Ratio (key!)
• Review Features

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Variable Annuity Contracts
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Discussion BreakPlease Pause the DVD
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Penalties
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Group Term Life Insurance
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Exclusions

• Group term life insurance premiums Sec. 79
• General Rule Employees may exclude premiums on
  the first 50,000 of group term life insurance
  that are paid by the employer. (The cost of group
  term life insurance over 50,000 face value is
  included in the TPs income according to IRC Sec.
  79)

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Example

• Employee Insurance
  CoverageName Age Coverage gt50,000 Factor
• Jack 41 70,000 20,000 1.20
• Donna 38 48,000 0 1.08
• Julie 46 95,000 45,000 1.80
• Factors from Uniform Premium Table

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Quiz Questions
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Short Quiz 3

• The exclusion ratio for an annuity is calculated
  by dividing the investment in the contract by the
  expected return under the contract.
• True
• False

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Short Quiz 3

• When group term life insurance is provided as
  part of an employer plan of group insurance, the
  cost of coverage up to 75,000 is not taxable to
  an insured employee.
• True
• False