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F.I.T.T of the Month
(Financial Information & Tax Tips)
July, 2014
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Quote, Attributed to a Well Known Politician:
"He who warned, uh, the British that they weren't gonna be takin' away our arms, uh, by ringing those bells, and um, makin' sure as he's riding his horse through town to send those warning shots and bells that we were going to be sure and we were going to be free, and we were going to be armed."
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TAX INDEMNIFICATION AGREEMENT
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A tax indemnification agreement, or language to that effect (indemnifying one side or the other for tax responsibilities), is often part of a divorce agreement. It is important to recognize that any such indemnification is strictly an arrangement between the soon-to-be ex-spouses. It is not an agreement to which the IRS (or any state body) is party. That means that the IRS (state) is not bound by that agreement. If there is a tax deficiency on a jointly filed tax return, the taxing authorities can go after either party to the joint return - for any part, or all of the tax obligation. All the indemnification does is give one party the right to demand (and sue) the other party to make good on that obligation. The IRS will go after the lower hanging fruit (or perhaps all the fruit and even some of the vegetables - but you get the idea). If the IRS, with all of its substantial powers, finds you the easier target to go after to collect taxes, what makes you think you will do any better going after that ex-spouse, regardless of any indemnification agreement. This is not to say that the indemnification agreement is worthless- if it fits your case, do get one. However, don't be mislead as to its power.
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Gifting, not in the sense of charitable contributions, but rather to family or friends, can serve a number of very good financial, as well as emotional, purposes. There are a few key financial and tax factors to keep in mind in regards to such gifting. For instance, gifts are not deductible; they are not reportable (unless of a large amount) by either the donor or the recipient. The current annual limitation is $14,000 per year from any person to any person. This has a number of interesting and important aspects - it's the current limit, it does change from year to year; it is a limit only in the sense that there is absolutely no reporting requirement unless you exceed that amount; it is to any person (relative, friend, or even stranger - or even the author of this enlightening tidbit); and this limitation is per person, so that a couple (think parents) can give $28,000 to any person (think child) per year without a reporting requirement. Gifts help to reduce one's estate - which even in this day and age of very high federal exclusions can still be beneficial - for family purposes, as well as state taxation purposes. And, depending on your philosophy of life, you might be of the mindset that says I want my children to be able to enjoy (some of) my money before I die (it deflects them from pondering the limits of your mortality).
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The Financial Information & Tax Tips are intended for general information and to provide ideas. They are presented in an abbreviated format. They are not tax advice, which can only be given on a one-on-one basis inasmuch as taxes are very complex and each situation is unique. If you believe that any tax tip is relevant to your situation, we urge that you consult with a tax professional.
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Kal Barson
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About Kal
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The Barson Group
60 East Main Street
PO Box 8018
Somerville, NJ 08876
Phone: (908) 203-9800
Fax: (908) 203-9399
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