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

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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

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Will v. Trust

A Will or a Last Will and Testament is a written document by which a person for whom a will is written, who is called the testator, states how the testator wants his/her property distributed after his/her death.

A Will does not take effect until after the testator dies. This means a will is ambulatory. Until the testator dies, the testator may change or revoke the will at any time and as many times as the testator may desire. This means a will is revocable.

To be a valid will, the testator must intend to make a will (and not some other document like a contract) at the time the will is signed by the testator, Illinois also requires that a will is in writing, signed by the testator and witnessed by at least two witnesses. A witness cannot be a beneficiary under the will. Finally, a will does require any particular format or a particular use of words.

In a will, a testator may dispose of two types of property: real property is anything that is fixed to the ground (i.e. buildings) and personal property which is everything else. A devise is a gift of real property made by a will from the testator to the beneficiary and a bequest is a gift of personal property made by a will.

If a person leaves his property in a will, this is called testate or a testamentary disposition and intestate or intestacy means a person died without a will.

If a person dies without a will, a state statute dictates the order of the beneficiaries. Basically, the statute starts with closest blood relatives (including the spouse) as the beneficiaries. The property does not go to the state unless there is no blood relatives alive.

The basic difference between a will and a trust is that all property distributed under a will goes through probate. However if the person dies and the value of the estate is less than $100,000.00, the estate is not subject to probate and can be transferred via a small estate affidavit.

A trust is a contract agreement between the person who creates the trust, who is called the trustor, grantor or settlor, and the person appointed by the trustor to oversee the management of the property in the trust, this person is called the trustee.

The trustor conveys certain identified property to the trustee once the trustee holds legal title of the property. The conveyance is made according to the terms of a trust agreement. Neither the trustee nor the trustor owns the property as does a natural person. This means that consequences of ownership of property by a natural person may be avoided.

A trust is created for the benefit of certain designated person or organizations know as beneficiaries, who will receive the property from the trust. A beneficiary may be entitled to all or some portion of the income of the trust, or all of the property of the trust, or both.

The trustor, trustee, and beneficiary may be the same person. The trust instrument and Illinois law impose certain duties and powers to the trustee.

A trust that goes into effect during the lifetime of the trustor is known as a living trust. A trust that does not become effective until the death of the trustor is called a testamentary trust and a testamentary trust is generally within a will.

In order for property to become part of the trust, the title to the property must be changed from the name of individual owner to the name of the trust.

When property is put into a trust the property is transferred from the estate of the owner to the trust and, consequently, all property that is in the trust passes to the beneficiaries immediately upon the death of the trustor. If the trust instrument exists but the title to the property is not changed from the individual to the name of the trust, then that property remains in the estate of the individual and must go through probate.

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

Removal of a Minor Child from the State of Illinois

Whether in a divorce proceeding or in a parentage action, the parent with whom the child resides on a daily basis (residential custody) may want to move to another state. Under Illinois law 750 ILCS (Illinois Compiled Statutes) 5/609, a party having residential custody of the minor children must obtain permission of the court to move to another state.

If the custodial parent wants to move within the state of Illinois, that parent does not have to seek court permission to move. If the custodial parent moves to another location within Illinois, then the other parent (non-custodial) parent will have to go to court and obtain a new visitation schedule if a custodial parent has moved a long distance making the existing visitation schedule not appropriate.

There are two major Illinois Supreme Court decisions that define the current law in Illinois on the issue of removal: In Re Marriage of Echert, 518 N.E.2d 1041 (1988) and In Re Marriage of Collingbourne, 791 N.E.2d 532 (2003).

The primary issue that courts are trying to decide in removal cases is whether the contemplated move by the custodial parent is in the best interest of the child

The primary factors that courts consider in deciding whether to grant the request to remove the child to another state are as follows:

1. The likelihood that the proposed move will enhance the quality of life for both the parent and child;
2. The motives of the noncustodial parent in resisting removal;
3. The existing visitation schedule between the noncustodial parent and the minor child; and
4. Whether the visitation schedule can be reached if removal is allowed that will foster the relationship between the minor child and the noncustodial parent.

The decision by the court is not limited to those facts.

The burden of proving that removal is in the best interests of the child is on the parent seeking removal.

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