More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
Continuing with the theme of how I employ tax planning in my advisory practice (part of AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012), in this post we'll examine a few implications surrounding a taxpayers filing status, which is usually determined by their standing on December 31 of the tax year. One exception occurs when a spouse dies before year end. If so, the surviving spouse may optimize their tax savings by filing as a Qualified Widow(er). Hence, if you are reviewing a client’s most recent tax return and notice this status, you might ask to read the deceased's will. You might also determine if any postmortem tax planning is warranted.
Married Filing Separate (MFS)
It is generally held that in a community property regime, married couples will fare better when they file Married Filing Jointly (MFJ). However, in a non-community property state, it may make sense to file MFS in certain situations.
For example, let's assume both spouses work, there is a rather large discrepancy in income (e.g.; one spouse's income is small), and there are a number of "AGI sensitive" deductions in play. In this case, choosing MFS could prove beneficial. Why? Because the spouse with the lower income will have a lower AGI and may be able to claim deductions otherwise lost. These deductions include, but are not limited to, unreimbursed business expenses which are subject to a 2.0% AGI floor and medical deductions which are subject to 7.5% of AGI. On the flip side, choosing this filing status may limit other tax benefits such as the credit for child and dependent care expenses and various education deductions. Therefore, caution should be taken.
This filing election may also be an indication of an impending divorce.
If the client is indeed preparing for divorce, it is important to consider making changes to their beneficiary elections. Also, during the settlement negotiation, estate and tax planning issues should be considered such as: property settlements, alimony and child support issues, retirement plan allocations, and more.
If one spouse has a large retirement plan, then a Qualified Domestic Relations Order or QDRO will likely emerge. A QDRO is a court order which governs the division of employee benefits or pension plans subject to ERISA. Because a divorce proceeding is a negotiated process, and because the assets of a retirement plan are normally fully taxable when received, they are less valuable than a non-qualified account of equal value. In the latter, there are no tax implications for withdrawals, except in the case when an asset must be sold to generate the needed funds, and there is a gain.
Some Key Dates
According to the Tax Foundation, April 12th is tax freedom day this year. That's three days longer than last year, but two weeks earlier than in 2007. Remember, the deadline for filing your 1040s this year is Tuesday, April 17.
Thanks for reading and have a great week!
See AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012, throughout the month of March.