No Income Tax Liability for IRA Withdrawals

Taxpayers are not liable for distributions from their IRAs made without their knowledge and without their consent the U.S. Tax Court ruled.

In 2008, three withdrawals were made from two IRA accounts maintained by the petitioner. Petitioner’s wife made the requested withdrawals and forged the husband’s signature on the three checks that were issued by the IRA’s. She deposited the money in a joint account with her husband, but the account was exclusively used by the wife. The petitioner first learned of the withdrawals when he received IRS Form 1099-R entitled, Distributions from IRAs. In 2009 the parties separated. During the divorce proceedings, the petitioner learned that his wife had deposited the IRA funds in the joint bank account the petitioner did not use. Furthermore, in 2009 the wife told the petitioner that she would prepare a joint tax return for the 2008 taxes. However, without the petitioner’s knowledge, the wife prepared a joint tax return for herself, an individual tax return for the petitioner and she under-reported petitioner’s income by $3,000.00, overstated a credit by $3,000.00 and omitted interest income of $74.00. In addition, the wife claimed petitioner was entitled to a refund of $3357.00 and the refund was deposited into her bank account.

The IRS issued a deficiency notice to the petitioner for the IRA distributions.

Distributions from IRA’s are taxable income and, in addition, subject to a 10% early distribution penalty if the taxpayer is under the age of 591/2. Sec. 408 (d)(1) and Sec. (+)(1).

The Tax Court stated that neither the Internal Revenue Code nor the Treasury Regulations define the terms “payee” or “distributee” and the code and applicable regulations do not provide specific guidance on when an amount is to be considered have been paid or distributed to a payee or distributee under Sec. 408 (d) (1).

 
However, the Tax Court said that “distributee” is not necessarily synonymous with recipient. In this case the distributions were unauthorized and completed without petitioner’s knowledge and the petitioner did not receive any benefit, directly or indirectly, from the withdrawal. The petitioner is not liable for the income tax liability and not liable for the 10% early withdrawal penalty

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

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Deducting Mortgage Interest Payments Made by a Third Person

The United States Tax Court ruled that paying a siblings mortgage may not be deductible by the party making the payment unless the payor can establish that the payor has assumed the benefits and burdens of ownership of the property (equitable interest).

In this case, brother and sister lived together. The brother was the legal owner of the house, but the sister made the mortgage payments after the brother became unemployed. The IRS does not allow a deduction of mortgage interest by the sister. The sister claimed she had an equitable interest in the property since she lived on the property.

The IRS does not allow a deduction for mortgage interest where the taxpayer does not establish “legal or equitable” ownership of the mortgaged property. 

1.  Sec. 163 allows a deduction for interest paid or accrued for a mortgage on real estate of which the taxpayer is legal or equitable owner, even though the taxpayer is not directly liable on the bond or note secured by such a mortgage. The U.S. Tax Court stated it disallows a deduction for mortgage interest where the taxpayer does not establish legal or equitable ownership of the property. Legal ownership means the taxpayer’s name is on the deed. Equitable ownership means the taxpayer has assumed the benefits and burdens of owning the property even though the taxpayer may not be on the deed to the property. 
2.  State law determines property rights and Federal law determines the appropriate tax treatment of those rights. 
3.  The property is located in California. Under California property law, the legal owner is presumed to be the owner of full beneficial interest and this presumption may be rebutted by clear and convincing evidence.

Under Federal tax law, certain factors are considered by courts to determine whether a taxpayer has assumed the benefits and burdens of ownership by considering whether a taxpayer had any rights to the property including, but not limited to the following: (1) to possess theproperty and to the use, rent and profits of the property; (2) duty to maintain the property; (3) responsible for insuring the property; (4) assumed the risk of the loss of the property; (5) obligated to pay taxes, assessments, and charges against the property; (6) has the right to improve the property; and, (7) to obtain legal title at any time by paying the balance of the purchase price.

In the case, the sister offered no evidence that she had an agreement with her brother entitling her to any of the above enumerated factors.       

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