David Ellis | TaxConnections

13 May 2022

Dividing Property In Divorce Tax Traps – Part 3 In Series

Tax Aspects Of Dividing Property In A Divorce (Series – Part 3

(This valuable series on Dividing Property In A Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.)

III. Section 1041 Specifics as to Type of Property

1. The Marital Residence

Perhaps the most common property division issue the practitioner will face when a couple divorces will be the division of the marital home. Often, which spouse, if any, will end up with the home will be the central issue in the property settlement.

Furthermore, non-monetary issues such as emotional attachments, or the preferred school district for couples who have children, frequently complicate matters.

Given the above, it is imperative that the practitioner be thoroughly familiar with the tax ramifications of dividing the residence.

A qualifying single taxpayer can exclude up to $250,000 of gain on sale of principle Qualifying married couples filing jointly can exclude up to $500,000.[1]
1. Taxpayer must have maintained the home as his/her principal residence for two out of the last five years.[2]
2. Taxpayer must have owned the residence for two out of last five years
3. Only one sale every two years qualifies for the exclusion. Taxpayer must not have used the exclusion during the previous two-year period before the current sale.[3]

Tax Trap Alert: Practitioners should familiarize themselves with the major exceptions and special cases IRC Section 121 and the related regulations and rulings address, including but not limited to the following:

Written by David Ellis | Posted in Divorce And Tax • Tax Traps

10 May 2022

Dividing Property In A Divorce Tax Traps – Part 2 In Series

Tax Aspects Of Dividing Property In A Divorce (Series – Part 2)

This valuable series on Dividing Property In A Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.

Major Exceptions to Nonrecognition of Gain or Loss
1. Transfers to trust in which property’s liabilities exceed basis.[1]
  1. Gain is recognized by transferor.
  2. Gain equals the amount by which property’s liabilities exceed basis.
  3. Trust increases its’ basis in the transferred property by the amount of gain
2. Transfer to Trust of Installment Instrument
  1. Transferring spouse recognizes untaxed built in gain upon transfer.^[2]
  2. Trust takes carryover basis plus trust gets increase in basis by the amount of gain recognized by transferee.[3]
  3. Post transfer interest income paid on installment instrument is taxable to trust.[4]
  4. Example: Transfers to Trust in Which Liabilities Exceed Basis.

Ward and June are in the process of getting a divorce. Ward inherited as separate property, a Japanese Samurai Sword that his grandfather brought back from World War I as a war trophy. The sword has an estimated Fair Market Value of $750,000.

Ward’s basis in the sword is $100,000, and he has pledged it as security for a business loan in the amount of $500,000. As part of the divorce settlement, Ward transfers the sword to a trust for the benefit of June. The trust assumes the loan on the sword. Ward must recognize a gain of $400,000 on transfer calculated as follows:

Written by David Ellis | Posted in Dividing Property In Divorce Tax Traps • Taxes And Divorce

06 May 2022

Dividing Property In A Divorce Tax Traps – Part 1 In Series

David Elllis CPAs - Tax Aspects Of Dividing Property In A Divorce

Dividing property during divorce may be one of the most difficult issues faced by tax planners. While most professionals are familiar with the general rule that property transferred during marriage and/or divorce proceedings is usually tax free [1], they may be less aware of the many thorny tax pitfalls that await the unwary. As with most tax matters, “the devil is in the details”. Issues such as how property is held, basis, depreciation, tax credit recapture, and holding period, are but a few of the problems that will confront tax practitioners in a divorce engagement.

Sometimes the tax impact of decisions made during divorce proceedings will not be realized, much less recognized, until many years down the road. Other times, the tax consequences may be just around the corner. The purpose of this course is to arm practitioners with the knowledge that will help them see what is coming down that road, or around that corner… while there is still time to do something about it.

I. The Big Rule – Code Section 1041 Overview

Written by David Ellis | Posted in Dividing Property In A Divorce Tax Traps • Tax Aspects Of Dividing Property In A Divorce

20 Dec 2021

Let Me Tell You About The Rich; They Live Very Differently From You And Me When It Comes To Federal Estate Taxes

Let Me Tell You About The Rich; They Live Very Differently From You And Me When It Comes To Estate Taxes

If there is one absolute certainty in life, it is one day all of us will have our last day. The unfortunate reality is that death does not just come calling for the aged and infirm. Every day in the United States thousands of people die from causes that are not natural, such as auto accidents, accidental poisoning (mostly drug and alcohol related), falls, drowning, boating and aircraft accidents, and even animal attacks. Some years ago, not far from this author’s home in Southern California a jogger was killed by a mountain lion. Not long after this incident, another runner was killed by an alligator in Florida. In fact, Florida seems to have more than its share of gruesome unnatural deaths. In 2013, Jeffrey Bush, a 37-year-old resident of Hillsborough County, Florida, was at home in bed, and a giant sinkhole swallowed the entire house—with him in it. They never found the body.

In the vast majority of cases involving sudden deaths, Federal Estate Tax is not an issue due to the current $11.70[1] Million Estate Tax exemption (as of the date of this writing) that is granted to each natural person[2]. Most people do not have estates that come anywhere near this amount. But what of the ultra-wealthy? Those 1/10 of one percent who fly through rarified air at 40,000 feet in their private Gulfstream and Lear Jets and take their summers in the Hamptons? What happens when they make their final exit without the chance to say goodbye? At least as far as Federal Estate Taxes are concerned the answer may be—not much. On the other hand, it may be—quite a lot. Which answer applies to any particular case depends on the quality and quantity of the estate planning done by the recently departed.

Written by David Ellis | Posted in Estate Taxes • Tax Planning Strategies • TaxConnections

09 Dec 2021

Time Sensitive California Tax Update

We wanted to provide you with an update regarding tax legislation recently passed that may affect you.

If you are a shareholder, partner, or member of an S corporation, partnership, or LLC, you may be able to reduce your federal income tax liability.

The Tax Cuts and Jobs Act reduced the amount of the state tax deduction individuals may claim on their federal tax return to a maximum of $10,000. This limitation caused significant tax increases to taxpayers living in high property and high state income tax states (such as California).

To assist business owners who are recovering from the global pandemic, California recently passed Assembly Bill 150 (AB 150). This bill allows qualified S corporations, partnerships, or LLCs to pay tax on their individual, trust, or estate owners’ share of the entity’s qualified net income at the entity level. Furthermore, the bill also allows these owners to claim a credit for the tax paid on their California personal income tax return. The effect of this is the following:

Written by David Ellis | Posted in California Tax Update • Tax Planning

18 Aug 2021

Tax Aspects Of Dividing Stock Options In Divorce

Mr. Kochansky Meets Revenue Ruling 2002-22

Richard W. Kochansky was a medical malpractice attorney who divorced his wife, Carol, in 1985. As part of their property settlement Richard agreed that he would share the contingent fee in a medical malpractice suit he was pursuing.

Little did he know that his agreement to share his prospective earnings with his soon to be former spouse would, more than a decade later, become part of a landmark revenue ruling that would determine how Silicon Valley royalty would be taxed on millions (perhaps billions) of dollars in stock options.

The general rule of dividing property between spouses in a divorce is governed by IRC Section 1041, which states that such transfers are as tax free gifts between the spouses with mandatory non-recognition of gain or loss. There is a carryover of basis and holding period to the transferee spouse. If and when the transferee spouse disposes of the property, he or she will recognize gain or loss as if he or she had owned the property from inception, and there is no tax effect on the transferor spouse.

Written by David Ellis | Posted in Divorce And Stock Options

10 Aug 2021

Death And Taxes: When The Wealthy Unexpectantly Perish

“Let me tell you about the very rich. They are different from you and me.” ~The Rich Boy, by F. Scott Fitzgerald, 1926.

If there is one absolute certainty in life, it is one day all of us will have our last day. The unfortunate reality is that death does not just come calling for the aged and infirm. Every day in the United States thousands of people die from causes that are not natural, such as auto accidents, accidental poisoning (mostly drug and alcohol related), falls, drowning, boating and aircraft accidents, and even animal attacks. Some years ago, not far from this author’s home in Southern California a jogger was killed by a mountain lion. Not long after this incident, another runner was killed by an alligator in Florida. In fact, Florida seems to have more than its share of gruesome unnatural deaths. In 2013, Jeffrey Bush, a 37-year-old resident of Hillsborough County, Florida, was at home in bed, and a giant sink hole swallowed the entire house—with him in it. They never found the body.

Written by David Ellis | Posted in Death And Taxes • Trust & Estate

04 Aug 2021

Radio Show Host Talks His Way To A Win In Tax Court On Employment Status: Employee V. Independent Contractor

A radio show host demonstrated that he could talk as well in tax court as he could in front of a microphone. At issue was the question of whether or not a person can be an employee as well as an independent contractor simultaneously with the same employer.

During 2007, Juan A. Ramirez was employed by Univision as an on-air talent and program director for radio station KXTN in San Antonio, Texas. In addition, to hosting a five-hour, six days a week radio program, his contract also called for him to perform various other duties.

These duties included working as an announcer at the radio station, attending staff meetings, and promoting the station in general by making off air appearances. For those services, Mr. Ramirez received a base salary, bonuses and stock options in Univision, the parent company of KXTN. Ramirez’s employment agreement stated that his work was subject to the control of Univision and that he was to live up to Univision’s professional standards in all aspects.

Written by David Ellis | Posted in Employee V. Independent Contractor

03 Aug 2021

Post-Tax Cuts And Jobs Act (TCJA) Alimony

More than three years have passed since the Tax Cuts and Jobs Act (TCJA) fundamentally changed how alimony is treated for federal tax purposes, yet confusion still reigns among many family law and tax professionals. One of the most common questions in this author’s experience is “Does modifying an alimony agreement that was in place prior to the TCJA cause alimony to become not taxable to the recipient spouse and not deductible for the payor spouse?” This question is frequently followed up with “Did we have to have the final decree of divorce or separation in place on or before December 31, 2018, to achieve deductibility for the payor spouse and income inclusion for the recipient spouse?

Although to the best of this author’s knowledge there has been no tax litigation to date on either of the above questions, a close look at the law as written, and subsequent IRS unofficial guidance would seem to indicate that the answer to both questions is “no”.

Written by David Ellis | Posted in Post-Tax Cuts And Jobs Act (TCJA) Alimony

27 May 2015

The Case Of The Secret Divorce And The Not So Innocent Spouse

Question:

What do a weekend trip to Mexico, a sneaky spouse, and a tax protest letter have in common?

Answer:

They are all components of a taxpayer’s losing plea for tax relief in front of the California State Board of Equalization.*

THE FACTS

Charles and Vickie Sine filed a joint California resident tax return (Form 540) for tax year 2005. It subsequently came to the attention of the Franchise Tax Board that they had Read More

Written by David Ellis | Posted in Income Tax • Individual • IRS • Tax Fraud/Evasion/Crimes

13 May 2015

Start 2015 Tax Planning Now! Part 4 (Final)

Tax Code Changes Create Challenges

How do you work and coordinate with attorneys and financial planners?

We make it a point to communicate with the client’s attorney and financial planner anytime we see anything of financial or legal significance that has happened or is likely to happen. For example, in some cases, by combining the estate and gift tax exemption with the proper use of certain irrevocable trust, millions of dollars in estate and gift taxes may be avoided. If we see that a client may potentially benefit from this type of strategy, we will work closely with his/her attorney and financial planner to implement a plan.

Written by David Ellis | Posted in Estate Planning Tax • Gift Tax • Individual • Tax Planning

12 May 2015

Start 2015 Tax Planning Now! Part 3

Tax Code Changes Create Challenges

Inheritance taxes and estate planning are a growing concern for affluent baby boomers. What are some of the major issues?

In addition to the double step-up in basis on community property discussed above, the baby boom generation will benefit from some of the most generous estate tax loopholes in history. For example, married couples have complete spousal exemption from estate and gift tax when transferring property to each other. This has not always been the case.

For 2015, every person has a lifetime net gift and estate tax exemption up to $5.43 million. Considering that the top gift and estate tax rate is 40%, this exemption represents an Read More

Written by David Ellis | Posted in Estate Planning Tax • Gift Tax • Tax Planning