Archive for the ‘general business credits’ Tag

Divorce Taxation – Part III

Originally published in the Pacific Grove Hometown Bulletin

July 4, 2012

Since it is July 4th, and we are discussing divorce, I suppose it would be appropriate to say, “Happy Independence Day!”

Tax Carryforwards

When going through a divorce it is important to realize you may have valuable “tax assets” that need to be divided according to tax law or negotiated between spouses.  Capital loss carryforwards (such as those generated by stock sales) are supposed to be allocated based on whose assets from the past created the losses.   Net operating loss carryforwards (such as those generated by a large business loss) are supposed to be determined by recalculating what the losses would have been if you had been filing separate.  Minimum tax, general business credit, and investment interest expense carryforwards can be negotiated.

Suspended passive activity losses (such as those generated by rental properties) go with the individual receiving the property, however, there are some pitfalls to avoid that could require the passive activity losses to be added to basis, rather than becoming immediately available to the spouse receiving the property.  If you happen to have bought a house with the $8,000 homebuyer credit that has to be repaid, the person who takes the home becomes solely responsible for repayment.

In practice, I have not seen the IRS come down heavily on how carryforwards are divided, but it is important to know what you are entitled to, so you do not miss out on something that could save you money down the road.


Children present a number of planning issues in a divorce.  Tax benefits related to children include the child’s exemption, child tax credits, dependent care credits, exclusion of income related to dependent care benefits, earned income credits, education credits, and head of household filing status.  The custodial parent (defined for tax purposes as the parent who lived with the child most during the year) is generally the one eligible for these benefits, although the custodial parent may release two of those (the exemption and child tax credits) to the noncustodial parent by filing Form 8332, and keep the remaining benefits. As discussed in a previous issue in this series, it is also possible for both spouses to claim head of household if the abandoned spouse rules are met.  If both parents meet certain qualifying child rules, they can also each claim medical and health insurance expense deductions they pay for the child and can distribute money from HSAs, MSAs, etc. for the child’s benefit.  When multiple children are involved, planning can be done to preserve the head of household status for both spouses.

Child support payments are not taxable income to the recipient parent, nor are they deductible by the parent paying the child support.  Alimony on the other hand is income to the recipient, and deductible by the paying parent.  Be sure your divorce decree is clear and specific on the payment of alimony and child support.  Alimony is a tricky area and you must be very careful about how it is paid.

To be continued next issue…

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.


Foreclosures and Short-Sales – Part V – Insolvency

Originally published in the Pacific Grove Hometown Bulletin

August 17, 2011

The last four issues I went over the basic concepts of foreclosures and short-sales, an overview of ways to exclude the resulting taxable income, the effects of recourse/nonrecourse debt, and the principal residence exclusion. If you missed these articles they are re-published on my website at This issue I will specifically discuss the exclusion available when you are insolvent.

Insolvency means your liabilities are greater than the fair market value of your assets – essentially you have a negative net worth. In such cases, the IRS may allow you to exclude cancellation of debt income, created as a result of losing a home or rental property, to the extent that you are insolvent. This insolvency calculation is performed based on your assets and liabilities the moment before your debts are discharged.

Let us assume you are losing a second home with recourse loans so the principal residence exclusion does not apply to you. You have a house worth $300,000 and the value of everything else you own – cars, savings, retirement plans, household items, etc. is $100,000 for a total of $400,000 in assets. Then assume your home loan was $550,000 and you have you have $50,000 in credit card debt and car loans for a total of $600,000 in liabilities. You are insolvent by $200,000. If your home was foreclosed, you would have cancellation of debt income of about $250,000. You can exclude $200,000 of the $250,000, from income, leaving you with only $50,000 of taxable income.

When calculating your insolvency, do not forget to include the fair market value of pension plans, annuities, etc. If you have a plan such as CalPers, for instance, that pays you a monthly retirement benefit, you need to call your plan administrator and ask for an actuarial calculation of the value of your plan. Some people are surprised to learn that that pension can easily be worth $500,000 or $1,000,000, and would drastically change your insolvency calculation!

After determining how much debt can be excluded, you then have to reduce any tax attributes you may have. In exchange for excluding the $200,000 of income as in the above example, you then have to reduce or eliminate tax benefits that may have been useful to you in the future, or defer tax to a later date through basis reductions in items you may sell later. There is a specific order, method, and timing for doing this, but items such as carryovers of net operating losses, general business credits, minimum tax credits, and capital losses; basis in depreciable and nondepreciable property; passive activity loss carryovers and foreign tax credit carryovers are all on the chopping block. If after all these rules are applied and you still haven’t traded enough to equal your exclusion, then you are off the hook!

Oh, and you still have to calculate the gain or loss on the disposition of the property. We will not discuss that in this issue.

It is possible for the insolvency exclusion to be used in conjunction with other exclusions, and there are ordering rules to the exclusions themselves. This is just a summary of some of the key provisions. There are many other circumstances and specific rules that could affect you, and you need to consult with a qualified professional to review your situation. Consult as soon as you can foresee the possibility of losing a home in order to plan the most tax efficient way to lose it.

If this exclusion does not help you completely, and you are losing a rental property, you may be eligible for the qualified real property business indebtedness exclusion – next issue’s topic!

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, Pacific Grove, CA, 93950. He can be reached at 831-333-1041.

Lost in Transition

Originally Published in the Pacific Grove Hometown Bulletin

March 16, 2011


In my experience in the tax profession and from my vantage point as a Certified Public Accountant, I can tell you stories that will make your heart sing.  I can also tell you stories that will make you shudder like you just heard a bad contestant on American Idol.  The stories that make you cringe are usually caused by moments of stupidity by other tax preparers, or sadly, by people losing at a game of Tax Return Russian Roulette1.  I like to think the stories of hearts singing involve me riding in on a metaphorical white horse to save the day, heralding a banner “To correct stupidity and promote safety locks on roulette guns…”  I grant you, it is an unusual banner.

If I may spare you some pain, dear reader, I would say be mindful of transitions between tax preparers (including yourself) – particularly if you are “downgrading” the type of preparer you use.  Over the years I have seen countless returns where valuable tax attributes from prior returns were not carried forward to the next year’s returns by a new preparer (effects ranging from hundreds to several hundred thousand dollars in tax).  Some of you may be under the impression that your tax returns each year are distinct; this is rarely true.

Let us look at a simple example and suppose that you bought or inherited some mutual funds in 2007 worth $11,000; you sold them in 2009 for $6,000 resulting in a $5,000 loss.  There is a good chance you would have been limited to using $3,000 of this loss in 2009 and the other $2,000 would have been a capital loss carryover to your 2010 returns that could save you $500 or more in tax.  Of course, if you switch preparers and the new preparer does not have the training or presence of mind to find the Schedule D from 2009 and look for any unused capital losses, the cost of your new tax preparer just went up by $500.  Sadly, you probably would never know a costly mistake was made.

There are many areas similar to the above item including: carryovers of net operating losses, basis in retirement contributions and depreciable assets, state tax payments or refunds, office-in-home expenses, charitable contributions, rental property expenses (passive activity losses), alternative minimum tax (AMT) credits, foreign tax credits, general business credits, etc.  Often there are different amounts for the federal and state returns, and perhaps even AMT amounts for each of those if you are or may become subject to AMT.  Unfortunately these are scattered throughout forms in the return, and just because your new preparers show you comparative figures in a tax summary when you pick up your returns, does not mean they entered any of the carryovers in their software.

You do not have to be rich or have a complicated return to be affected by a number of these.  However, it does generally hold true, that the more money you make and the more types of activities you are involved with (rental properties, investments, etc.) the more heavily you are affected.

If you are doing the returns yourself with tax software for the first time, look carefully through the returns for hints of the above mentioned items, and be very diligent in answering the tax software questions.  Also, be wary of deleting items you think you no longer have, as they may have carryover or suspended items attached to them.  One of your big challenges is to know what the returns are supposed to look like when you are through.  If you are switching preparers, make sure the new preparer is qualified.  You may want to ask what specific carryover information was picked up from the old returns.

Let it be said of you, “You have chosen…wisely.”  I hope I do not have to saddle up my white horse on your behalf, as I still prefer a regular appointment.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950.  He can be reached at 831-333-1041.


Tax Return Russian Roulette – noun – a form of legalized gambling with generally poor odds whereby untrained participants willingly subject themselves to cruel and unusual punishment in the form of self-tax preparation, risking thousands of dollars in order to save hundreds.