Tax Returns, Decoded

1. Tax Returns, Decoded February 6, 2013 Hon. Roy L. Moore Todd Frankfort Jeremy Robin

2. General Layout

3. Income reflected on Page 1 (organized by type of income received) Deductions listed on Page 2 Total tax illustrated on Page 2 Detail included on supporting schedules

4. Schedule A: Itemized Deductions

5. Reflects information specific to tax-deductible expenses • Required of all tax payers who elect to itemize their deductions • Useful for the Family Law practitioner: • Quantifying the marital estate • Identifying reimbursement claims

6. Line 6: Real Estate Taxes • Confirms residential real property owned • Amount of tax could suggest approximate value of the property • Potential reimbursement claim if the real estate is one spouse’s separate property • Be mindful of multiple properties

7. Line 10: Home Mortgage Interest • Confirms residential real property owned • Amount of interest could suggest approximate balance of debt • Potential reimbursement claim if the debt is one spouse’s separate property liability • Be wary of multiple mortgages

8. Schedule B: Interest and Ordinary Dividends

9. Amounts of interest and dividends reported, organized by source • Required for tax payers • Reporting $1,500 of taxable interest or dividends • Receiving income from foreign accounts • Useful to the Family Law practitioner: • Quantifying the marital estate • Estimating income actually received

10. Part I: Interest • Confirms financial institutions at which the parties have interest bearing accounts • Amounts of interest suggest approximate account balances (estimate 1% - 1.5%) • Note that pass-through interest may be reported but not received

11. Part II: Ordinary Dividends • Confirms financial institutions at which the parties hold brokerage accounts • Amounts of dividends suggest approximate account balances (estimate 2.5%) • Be aware that pass-through dividends may be reported but not received

12. Part III: Foreign Accounts and Trusts • Discloses whether the parties have foreign bank accounts

13. Schedule C: Profit or Loss from Business

14. Business revenue and expenses attributable to sole proprietorship • Useful to the Family Law practitioner: • Quantifying the marital estate • Valuing the sole proprietorship • Estimating income actually received

15. Estimating income actually received – pay attention to discretionary expenses

16. Schedule D: Capital Gains and Losses

17. Reported capital gain income, organized by source (accounts and/or assets) • Beginning in 2011, transaction detail located on Form 8949 • Useful to the Family Law practitioner: • Characterizing assets and income • Identifying reimbursement claims • Quantifying and valuing the marital estate

18. Characterization • Note whether property was acquired prior to or during marriage • Can support the separate property character of funds received for the sale of assets, as well as the unsold portions of assets

19. Reimbursement Claims • Tax liability attributable to separate property capital gains is a separate property liability • Schedule D does not disclose the amount of the liability, only the size of the capital gain

20. Capital Loss Carryover • Maximum capital loss that the IRS will allow for a given year is $3,000 • Capital losses in excess of $3,000 are carried over and applied to future years • Capital loss carryovers offset future capital gains and reduce capital gains taxes in future years

21. Pay Attention to Line 16 of Schedule D • Capital loss carryovers are assets • Valuation can be difficult • Generally split between the parties

22. Schedule K-1

23. Issued to pass-through entity’s owners (partners, members, or shareholders) • Reflects ownership interest and share of income, expenses, and distributions • Partner’s capital account • Useful to the Family Law practitioner: • Quantifying the marital estate • Valuing the marital estate • Estimating income actually received • Identifying reimbursement claims

24. Note the Size of the Ownership Interest

25. Pay Attention to Income Reported vs. Income Received (Distributions)

26. Reimbursement Claims • Tax liabilities on pass-through income in excess of funds distributed • Under-compensation (Jensen claims) • Contributions during marriage to a separate property entity

27. Consider All Elements of Compensation • $ 60,000 • 45,000 • $ 105,000 • W-2 wages • Entity distributions • Total receipts

28. Contributions to a Partnership • Potential issues related to characterization and reimbursement claims

29. Schedule E: Supplemental Income

30. Part I: Rental Real Estate and Royalties • Income and expenses attributable to: • Real estate rental income • Royalty income (mineral interests) • Useful to the Family Law practitioner: • Characterizing income received • Identifying reimbursement claims • Quantifying the marital estate • Estimating income actually received

31. Characterization • Pay attention to what type of property is generating the income

32. Reimbursement Claims • Expenses attributable to properties listed on Schedule E which are characterized as separate property • Potentially offset to the extent that income generated by the property exceeds the expense • Potentially mitigated with tax deductions attributable to expenses on separate property

33. Estimating Income Actually Received • Determine whether non-cash expenses have been deducted in calculating net income • Be mindful of which expenses are actually “non-cash”

34. Part II: Partnerships & S-Corporations • Pass-through income and loss attributable to partnerships and s-corporations • Entity income taxed at individual level • Income not necessarily received by the individual • Useful to the Family Law practitioner: • Quantifying the marital estate • Identifying reimbursement claims

35. Part II: Partnerships & S-Corporations • Lists all partnerships / s-corporations reporting income / loss • Reflects the amount of reported income / loss (different from distributed amount) • Reimbursement claim on tax liabilities in excess of funds distributed