Qualified Domestic Relations Order (QDRO)

A qualified domestic relations order (QDRO) is a court order or judgment that requires that all or a part of a person’s participant retirement benefits be paid to a spouse, former spouse, child or other dependent of the “participant.” The recipient of the retirement benefits is called the “alternate payee.” Administrators of pension, profit sharing, or stock bonus plans (retirement plans) must give their written approval to a proposed QDRO. A QDRO must contain specific language that identifies the retirement plan, names and addresses of the participant and alternate payee, and the amount and total number of payments to the alternate payee under the QDRO.

When the alternate payee is the spouse or former spouse, then the alternate payee pays income taxes on the QDRO payments. If the alternate payee is a child or other dependent, then the participant pays income taxes on the QDRO payments.

 If the participant under the retirement plan would have been eligible for a rollover, then the alternate payee may make a tax free rollover to a traditional IRA or to a qualified plan. If the plan participant was born before 1936, the distribution may be eligible for special averaging for tax purposes if the distribution meets an IRS lump sum distribution test. If the distribution meets the IRS requirements, the recipient qualifies for a 10 year averaging and 20% capital gains. If the plan participant was born after 1935, the alternate payee is not eligible for the special tax treatment.

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas. 

LAW OFFICE OF ROBERT S THOMAS

1655 N Arlington Heights Rd, Suite 300West

Arlington Heights IL 60004

847-392-5893 phone
info@attorneyrobertthomas.com

Se Habla Español

Alimony/Maintenance Payments

Alimony payments (also known as “Maintenance”) are made by one spouse to another, pursuant to a court decree to provide supplemental income to maintain the standard of living that the receiving spouse (i.e. obligee) experienced during the marriage. The payments may continue for a fixed period of time or for the life of the obligee spouse.

In Illinois maintenance will terminate upon the occurrence of any of the following events: (1) remarriage of the recipient/obligee; (2) death of the recipient; (3) death of the payor/obligor; or (4) recipient co-habits with another person on a continuing conjugal basis.

Alimony, or maintenance payments, are taxable income to the recipient spouse (obligee). The obligee reports maintenance as income on Form 1040, line 11. IRS Forms 1040A, 1040EZ, or 1040NR-EZ cannot report maintenance income. For the party making the maintenance payments, the taxpayer may deduct the alimony paid by entering the alimony paid on Form 1040, line 30a and enter the spouse/obligee SSN or ITIN on line 31b.

There are four conditions that must be met for payments to a spouse to be considered maintenance: (1) payments must be made pursuant to a court decree; (2) payments must be made in cash, and not in a transfer of property; (3) spouses must not live together; and obligation to make payments terminates upon the death of the recipient/obligee.

Payments to a person who was never legally a spouse cannot be treated as maintenance.

Child support payments are not deductible by the payor/obligor spouse and are not taxable income to the recipient/obligee spouse. Furthermore if maintenance payments may be reduced upon a contingency relating to a child such as reaching a certain age or income level, marries, attend school, attains employment, etc., then the payment will be deemed child support by the IRS.

Attorney fees incurred to receive maintenance up to 2% of adjustable gross income but the deduction of attorney fees is not allowed for determination of the alternative minimum tax.

If the alimony payments decrease or end during the first three years then the payments are subject to “recapture rules.” The three years start the first calendar year that the payments qualify as maintenance under a court decree, but temporary support orders are excluded. The second and third years are the next two calendar years regardless of whether payments are actually made.

Recapture means reported as income. For the payor/obligor, deductible maintenance payments made in the first or second year, are recaptured or reported as income, in the third year. Payments made in the first year are recaptured if they exceed the payments in the second year by $15,000.00. Payments made in the second year are recaptured if they exceed the payments made in the third year by $15,000.00.

Common reasons for a reduction in alimony payments are a change in the divorce or legal separation decree; failure by the obligor to make payments; reduction in ability of obligor to make payments; or a reduction in the recipient spouse’s support needs.

If the obligor must add back alimony (recapture) as income, show it on IRS Form 1040, line 11 entitled “alimony received” cross out received and write “recapture” and enter the recipient/obligee spouse’s SSN or ITIN and name on dotted line next to the amount. For the recipient spouse/obligee, deduct the recapture amount by writing in the amount on IRS Form 1040, line 31a entitled “alimony paid,” and cross out “paid” and write “recapture.”

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas. 

LAW OFFICE OF ROBERT S THOMAS

1655 N Arlington Heights Rd, Suite 300West

Arlington Heights IL 60004

847-392-5893 phone
info@attorneyrobertthomas.com

Se Habla Español

The Minimum Interest Rate for Mortgages

The price that a purchaser is willing to pay for property will increase if the purchaser can obtain financing on favorable terms, whether the financing is provided directly by the seller, from a third party, or in the assumption of a mortgage. The latter category includes: the buyer acquires the property “subject to the debt” without taking on personal liability; the buyer and seller are jointly or severally liable for the debt; or, the buyer becomes liable for the debt and the seller is released from liability.

Under the Deficit Reduction Act of 1984 (DEFRA), Congress added Section 7872 to the Internal Revenue Code in 1984 so that interest free loans and below market loans would be taxed in accordance with their economic substance. Section 7872 operates by imputing interest on loans that do not charge a market rate of interest.

A loan is any extension of credit including purchase money mortgage, in which the owner of money permits another person to use the money for a period of time after which the money is to be transferred to the owner or applied accordingly to an express or implied agreement with the owner. Treas. Reg. {1.7872-2(a)}.

A taxpayer’s characterization of a transaction as a prepayment or loan is not conclusive. Transactions will be characterized for tax purposes according to their economic substance rather than the terms used to decide them. Id.

A below market loan is a loan that does not require payment of interest at a rate at least equal to the Applicable Federal Rate (AFR). Treas. Reg. {1.7872-3(a)}.

The AFR is divided into three categories: (1) A short-term rate that applies to loans having a maturity of three years or less; (2) A mid-term rate that applies to loans having maturity of more than three years or less than nine years; and (3) A long-term rate that applies to loans having a maturity of nine years or more from the date of issue. Sec. 1274(d).

The rates are determined by the Treasury Department within 15 days after the close of six month periods ending on September 30 and March 31. The rates determined to reflect the average yield for a six month period ending on September 30 are applicable during the six month period beginning on January 1 of the succeeding calendar year. The rates determined to reflect the average yield for the period beginning on the following July 1. Treas. Reg. {1.7872-3(b)(1)}

Sec. 7872 does not apply to any loan which has sufficient states interest. A loan has sufficient interest if it provides for interest on outstanding loan balance as a rate no lower than the applicable Federal rate based on compound period appropriate for the loan. Treas. Reg. {1.7872-3(3)(c)}.

The term demand loan means any loan which is payable in full at any time on demand of the lender. It includes any loan with an indefinite maturity and any loan if the benefits of the interest arrangements of such loans are not transferable and are conditioned on the future performance of substantial service by an individual. Sec. {(7872(e)}.

The AFR for demand loans is the short term AFR. The demand loan becomes a below market loan if the interest payable on the loan is at a rate less than the applicable AFR. Sec. {7872(e)}.

The amounts of the loan are treated as transferred and re-transferred on a daily basis and the applicable Federal rate for any day is the relevant rate for the six month period in which such day falls. Tax Management Sec. 535 p. B-409.

A term loan is any loan that is not a demand loan. The applicable Federal rate is the rate for the day the loan is made and the relevant rate is determined by the reference to the term of the loan short-term, mid-term or long-term rate. Sec. {7872(e)}. A term loan becomes a below market loan if the amount loaned exceeds the present value of all payments under the loan, determined as of the day the loan is made, using a discount rate equal to the applicable Federal rate in effect on the day of the loan is made. Treas. Reg. {1.7872-3(a)(2)}.

Finally, the amount of loaned means the amount received by the borrower. 

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas. 

LAW OFFICE OF ROBERT S THOMAS

1655 N Arlington Heights Rd, Suite 300West

Arlington Heights IL 60004

847-392-5893 phone
info@attorneyrobertthomas.com

Se Habla Español