Personal Finance: SPECIAL | REPORT MONEY MANAGEMENT

& TAX PLANNING

5MINUTES: BILL DIMICK— 22 PROFILE: JEANIE WYATT— 24 LIST: STOCK BROKERAGES— 25

21

BY DAN R. GODDARD

While political gridlock in Wash-ington D.C. means the tax laws haven’t changed much since

2010, the federal government has tough-ened reporting requirements for 2011 — especially as it scrounges for money to relieve the mounting federal defi cit.

The good news: Taxpayers have a cou-ple of extra days to fi ll out 1040 or 4848 tax forms this year because the due date has been extended to April 17.

The bad news: Extra care should be taken with reporting capital gains, foreign fi nancial assets and 1099 forms, says Dana Gasparek, partner, Padgett Stratemann & Co.

“Reporting individual capital gains trans-actions has undergone a major change be-cause of new IRS reporting requirements,” Gasparek says. “Individuals with capital gain transactions will need to use the re-vised Schedule D and the new IRS Form 8949, which has extra columns to indicate whether a transaction has any special characteristics. Short-term gains are taxed at ordinary rates, and long-term gains are taxed at a preferred rate of either zero or 15 percent. But beginning Jan. 1, 2013, the capital gain tax rate might change to 10 percent or 20 percent, depending on what Congress decides about the expiration of this tax rate provision.”

The so-called Bush tax cuts are due to

expire at the end of this year, which may mean higher taxes and reduced deduc-tions and credits in 2013.

Playing defenseAlthough the federal government hasn’t

been able to raise tax rates, it is cracking down on areas where assets might be hid-den, such as off-shore accounts.

This year, taxpayers with signifi cant fi -nancial assets abroad must fi le Form 8938. This includes married couples living in the United States whose foreign fi nancial as-sets exceed $100,000 at the end of 2011 or tops $150,000 at any time during the year. These thresholds are halved for singles in the U.S. and are doubled for single fi lers who live abroad.

“The IRS is trying to increase tax com-pliance among taxpayers with fi nancial as-sets held outside the U.S.,” Gasparek says. “This includes offi cers in a company who have signature authority over a foreign bank account.”

The IRS also is paying more attention to 1099 forms. These are used to report vari-ous types of payments of at least $600 or more to a single payee, such as indepen-dent vendors, including compensation paid to non-employees, payments for rent and for prizes.

Failure to comply with these new reporting

SCHEDULE D

(Form 1040)

Department of the Treasury

Internal Revenue Service (99)

Capital Gains and Losses

Attach to Form 1040 or Form 1040NR. See Instru

ctions for Schedule D (Form 1040).

Use Form 8949 to list your tr

ansactions for lines 1, 2, 3, 8, 9, and 10.

OMB No. 1545-0074

2011Attachment

Sequence No. 12

Name(s) shown on return

Your social security number

Part I

Short-Term Capital Gains and Losses—Assets Held One Year or Less

(

)

(

)

(

)

Complete Form 8949 before completing line 1, 2, or 3.

This form may be easier to complete if you round off cents to

whole dollars.

(e) Sales price from

Form(s) 8949, line 2,

column (e)

(f) Cost or other basis

from Form(s) 8949,

line 2, column (f)

(g) Adjustments to

gain or loss from

Form(s) 8949,

line 2, column (g)

(h) Gain or (lo

ss)

Combine columns (e),

(f), and (g)

1

Short-term totals from all Forms 8949 with box A

checked in Part I . . . . . . . . . . . . .

2

Short-term totals from all Forms 8949 with box B

checked in Part I . . . . . . . . . . . . .

3

Short-term totals from all Forms 8949 with box C

checked in Part I . . . . . . . . . . . . .

4 Short-term gain from Form 6252 and short-te

rm gain or (loss) from Forms 4684, 6781, and 8824 .

4

5

Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from

Schedule(s) K-1. . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

6

Short-term capital loss carryover. Enter the amount, if

any, from line 8 of your Capital Loss Carryover

Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . . 6 (

)

7 Net short-term capital gain or (loss). Combine lines 1 through 6 in column (h). If you have any

long-term capital gains or losses, go to Part II below. Otherwise, go to Part III

on the back . . .7

Part II

Long-Term Capital Gains and Losses—Assets Held More Than One Year

(

)

(

)

(

)

Complete Form 8949 before completing line 8, 9, or 10.

This form may be easier to complete if you round off cents to

whole dollars.

(e) Sales price from

Form(s) 8949, line 4,

column (e)

(f) Cost or other basis

from Form(s) 8949,

line 4, column (f)

(g) Adjustments to

gain or loss from

Form(s) 8949,

line 4, column (g)

(h) Gain or (lo

ss)

Combine columns (e),

(f), and (g)

8

Long-term totals from all Forms 8949 with box A

checked in Part II

. . . . . . . . . . . .

9

Long-term totals from all Forms 8949 with box B

checked in Part II

. . . . . . . . . . . .

10

Long-term totals from all Forms 8949 with box C

checked in Part II . . . . . . . . . . . . .

11

Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (lo

ss)

from Forms 4684, 6781, and 8824 . . . . . . . . . . . . . . . . . . . . . .11

12 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1

12

13 Capital gain distributions. See the instructions . . . . . . . . . . . . . . . . . .13

14

Long-term capital loss carryover. Enter the amount, if any, fro

m line 13 of your Capital Loss Carryover

Worksheet in the instructions . . . . . . . . . . . . . . . . . . . . . . .14 (

)

15

Net long-te

rm capital gain or (loss). C

ombine lines 8 through 14 in column (h). Then go to Part III on

the back .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

For Paperwork Reduction Act N

otice, see your tax return instru

ctions.

Cat. No. 11338H

Schedule D (Form 1040) 2011

DInternal R

Name(s) shown o

Part I

Short-Term Capita

Complete Form 8949 before completing line 1, 2,

This form may be easier to complete if you round

whole dollars.

1Short-te

rm totals from all Forms 89

checked in Part I . . . . . .

2Short-te

rm totals from all Form

checked in Part I. . . .

3 Short-term totals from all

checked in Part I. . .

4Short-te

rm gain from

5 Net short-term

Schedule(s) K-1

6 Short-term ca

Worksheet

7 Net sh

long

Part

C

(

(

(

)

cent

A

4, 6781, and 8824 .4

s and trusts from

. . . .5

oss Carryover

. .6 (

)

any 7

Gain or (loss)

e columns (e),

nd (g)

Schedule D (Form 1040) 2011

Page 2

Part III Summary16 Combine lines 7 and 15 and enter the result . . . . . . . . . . . . . . . . . .

16

• If line 16 is a gain, enter the amount from line 16 on Form 1040, line 13, or Form 1040NR, line

14. Then go to line 17 below.

• If line 16 is a loss, skip lines 17 through 20 below. Then go to line 21. Also be sure to complete

line 22.• If line 16 is zero, skip lines 17 through 21 below and enter -0- on Form 1040, line 13, or Form

1040NR, line 14. Then go to line 22.

17 Are lines 15 and 16 both gains?

Yes. Go to line 18.

No. Skip lines 18 through 21, and go to line 22.

18 Enter the amount, if any, from line 7 of the 28% Rate Gain Worksheet in the instructions . .18

19

Enter the amount, if any, from line 18 of the Unrecaptured Section 1250 Gain Worksheet in the

instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

20 Are lines 18 and 19 both zero or blank?

Yes. Complete Form 1040 through line 43, or Form 1040NR through line 41. Then complete

the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040,

line 44 (or in the instructions for Form 1040NR, line 42). Do not complete lines 21 and 22

below. No. Complete Form 1040 through line 43, or Form 1040NR through line 41. Then complete the

Schedule D Tax Worksheet in the instructions. Do not complete lines 21 and 22 below.

21 If line 16 is a loss, enter here and on Form 1040, line 13, or Form 1040NR, line 14, the smaller of:

• The loss on line 16 or

• ($3,000), or if married filing separately, ($1,500) } . . . . . . . . . . . . . . .21 ( )

Note. When figuring which amount is smaller, treat both amounts as positive numbers.

22 Do you have qualified dividends on Form 1040, line 9b, or Form 1040NR, line 10b?

Yes. Complete Form 1040 through line 43, or Form 1040NR through line 41. Then complete

the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040,

line 44 (or in the instructions for Form 1040NR, line 42).

No. Complete the rest of Form 1040 or Form 1040NR.

Schedule D (Form 1040) 2011

.18

e

199

8% Rate Gain Worksh

rom line 18 of the Unrecaptured

. . . . . . . . . . . .

e lines 18 and 19 both zero or blank?

Yes. Complete Form 1040 through line

the Qualified Dividends and Capital

line 44 (or in the instructions for

below. No. Complete Form 1040

Schedule D Tax Works

21 If line 16 is a loss• The loss• ($3 0

Form 8949

Department of the Treasury

Internal Revenue Service (99)

Sales and Other Dispositions of Capital Assets

See Instructions for S

chedule D (Form 1040).

For more information about Form 8949, see www.irs.gov/form8949

Attach to Schedule D to list your tr

ansactions for lines 1, 2, 3, 8, 9, and 10.

OMB No. 1545-0074

2011Attachment

Sequence No. 12A

Name(s) shown on return

Your social security number

Part IShort-T

erm Capital Gains and Losses—Assets Held One Year or Less

Note: You must check one of the boxes below. Complete a separate Form 8949, page 1, for each box that is checked.

*Caution. Do not complete column (b) or (g) until you have read the instructions for those columns (see the Instructions for Schedule

D (Form 1040)). Columns (b) and (g) do not apply for most tra

nsactions and should generally be left blank.

(A) Short-term transactions reported on

Form 1099-B with basis reported to the IRS

(B) Short-term transactions reported on Form

1099-B but basis not reported to the IRS

(C) Short-term transactions for which

you cannot check box A or B

1

(a)

Description of property

(Example: 100 sh. XYZ Co.)

(b)

Code, if any,

for column (g)*

(c)

Date acquired

(Mo., day, yr.)

(d)

Date sold

(Mo., day, yr.)

(e)

Sales price

(see instructions)

(f)

Cost or other basis

(see instructions)

(g)

Adjustments to

gain or loss, if any*

2Totals. Add the amounts in columns (e) and (f). Also, combine the

amounts in column (g). Enter here and include on Schedule D, line 1 (if

box A above is checked), line 2 (if b

ox B above is checked), or line 3 (if

box C above is checked) .. . . . . . . . . . . . . .

2

For Paperwork Reduction Act N

otice, see your tax return instru

ctions.

Cat. No. 37768Z

Form 8949 (2011)

Depar

Internal Reven

Name(s) shown on ret

Part IShort-T

erm Capital Ga

Note: You must check one of the boxes below. Co

*Caution. Do not complete column (b) or (g) until you have

D (Form 1040)). Columns (b) and (g) do not apply for most tra

nsac

(A) Short-term transactions reported on

Form 1099-B with basis reported to the IRS

(B) Short-Short-te

rm trter

ansactions rep

109099-B but basbasis not reported to the I

1

(a)

Description of property

(Example: 100 sh. XYZ Co.)

(b)

Code, if any,

for column (g)*

(c)

Date acquired

acq

(Mo., dayay, yr.), y

(d)

Date sold

(Mo., day, yr.)

Sales p

(see instructions)

2Totals. Add the amounts in columns (e) and (f). Also, combine the

amounts in column (g). Enter here and include on Schedule D, line 1 (if

box A above is checked),

A

line 2 (if box B above is checked), or lin

e 3 (if

box C above is checked) . . . . . . . . . . . . . . .2

For Paperwork Reduction Act N

otice, see your tax return instru

ctions.

Cat. No. 37768Z

Formorm 8949 (2011)

Form 8949 (2011)

Attachment Sequence No. 12APage 2

Name(s) shown on return. Do not enter name and social security number if shown on other side.

Your social security number

Part IILong-Term Capital Gains and Losses—Assets Held More Than One Year

Note: You must check one of the boxes below. Complete a separate Form 8949, page 2, for each box that is checked.

*Caution. Do not complete column (b) or (g) until you have read the instructions for those columns (see the Instructions for Schedule

D (Form 1040)). Columns (b) and (g) do not apply for most transactions and should generally be left blank.

(A) Long-term transactions reported on

Form 1099-B with basis reported to the IRS (B) Long-term transactions reported on Form

1099-B but basis not reported to the IRS (C) Long-term transactions for which

you cannot check box A or B

3

(a) Description of property

(Example: 100 sh. XYZ Co.)(b) Code, if any,

for column (g)*(c) Date acquired

(Mo., day, yr.)(d) Date sold

(Mo., day, yr.) (e) Sales price (see instructions) (f)

Cost or other basis

(see instructions) (g) Adjustments to

gain or loss, if any*

4Totals. Add the amounts in columns (e) and (f). Also, combine the

amounts in column (g). Enter here and include on Schedule D, line 8 (if

box A above is checked), line 9 (if box B above is checked), or line 10

(if box C above is checked) . . . . . . . . . . . . . . 4

Form 8949 (2011)

The Devil’sDevil’sin theDetails

Reporting capital gains and foreign assets on your2011 return requires fastidiousness

CPA John A. Poteet Jr. says many deductions and credits expired in 2011.ERIK

REY

NA

/ SAN

AN

TON

IO B

USIN

ESS

JOUR

NAL

See TAXES, Page 27

SAN ANTONIO BUSINESS JOURNAL | MARCH 2, 2012

22 MARCH 2, 2012 PERSONAL FINANCE: MONEY MANAGEMENT & TAX PLANNING www.sanantoniobusinessjournal.com

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During 2009 and 2010, the partners in Padgett Stratemann & Co. — San Anto-nio’s second largest accounting fi rm — heard and read a lot about the Eagle Ford Shale.

“But it did not seem to translate into the local and rural business community,” says William “Bill” E. Dimick III, CPA, ASA, ABV and partner in Padgett Stratemann. “During 2011, that all changed.”

Indeed, the corporate side of the fi rm’s oil and gas practice experienced a steady fl ow of clients in 2011. That trend contin-ues in 2012.

“The various oil and gas service com-panies, such as logistics, frac sand, coil tubing, and equipment sales are showing exponential growth. Also, related transac-tional work has recovered nicely,” Dimick says.

What’s more, individual and family es-tate planning surrounding Eagle Ford also is heating up.

“Trickle-down economics is alive and well in South Texas, and the Eagle Ford Shale development is at its heart,” Dimick says. “I have also seen indirect effects, such as large charitable donations from the mineral owners who received sizeable

lease bonuses. This is an exciting time for San Antonio.”

With more than 19 years of public accounting experience, Dimick has a unique perspective on trans-action-related projects, making use of both his business valuation and tax knowledge. He took a few minutes (in the middle of tax sea-son!) to help readers sort out oil and gas tax issues. You can reach Dimick at bill.dimick@padgett-cpa.com

Q Have people been blindsided by the

tax consequences of the money fl owing from the Eagle Ford Shale?

A Not really. Actually, my experience has been a

much more proactive dia-logue from the mineral own-ers regarding the tax con-sequences of their various transactions. I suspect this is the case with most people, given the large size of the typi-cal payment we are seeing. It is typical for the mineral owner to immediately want to understand how much tax they will owe.

Q What are the most com-mon types of oil-and-gas

payments subject to ordinary income taxes?

A The most common types of or-dinary income paid to a lessor

include royalty income, lease bo-nus income (sometimes referred to as an advance royalty), delay

rents (sometimes referred to as shut-in royalties), seismograph payments, and oc-

casionally, working interest income.

Q What kind of payments are subject to capital gains tax?

A Not many. Some damage pay-ments to a land owner, for ex-

ample, have been held to be a nontaxable return of capital to the extent of applicable tax basis. It is tricky because it is diffi cult to distinguish this type of payment from other payments held to be rentals, par-ticularly in the case of anticipatory payments for damages.

The outright sale of a royalty interest can

also qualify as a sale of a capital asset, subject to the

facts and circumstances of the owner.

We are beginning to see more sales of right-of-ways to pipeline companies who want to run pipe across many South Texas ranch-es to transport the miner-als. The sale of an intangi-ble asset such as this may also qualify as a sale of a capital asset.

Q What are some ways to minimize

the tax costs?

A Generally, royalty own-ers incur few expenses

so there is a very limited opportunity to minimize taxes. As a royalty owner, make sure you capture the basic deductions. For example, since a royalty owner holds an economic interest in the property, he is also typically entitled to a corresponding deple-tion deduction of 15 percent of gross royalty income, subject to certain limitations. Pro-duction taxes and insurance are also com-mon deductions we see.

Q What are the biggest tax mistakes you hear or see Eagle Ford Shale

property owners make?

A The Eagle Ford Shale play is still pretty young so I have not seen too

many mistakes thus far. We picked up a new client last year when he was advised initially that the $2 million bonus payment he received was taxed as a capital gain — only to be told by his adviser on April 14th — that it is actually ordinary income. He owed an additional $400,000 in income tax. Surprises like that don’t ever go over well, understandably so.

Q Is there anything we didn’t ask about this topic that would be

important to include?

A As part of the run up with the Eagle Ford Shale activity, we have seen a

ten-fold increase in family estate planning around the ownership of ranches and the minerals. From a valuation substantiation standpoint, it is critical to transfer owner-ship in the minerals before they become proven reserves. That is getting more diffi -cult in a valuation sense as Eagle Ford Shale becomes more established. We are valuing one to two family partnerships a month that hold Eagle Ford related ranches and miner-als, all related to gift tax planning.

Bill Dimick: CPA breaks down the tax responsibilities of mineral owners in the Eagle Ford Shale.

s is an exciting time for

19 years of public rience, Dimick pective on trans-ojects, makingsiness valuation. He took a few ddle of tax sea-rs sort out ues. You

at bill.a.com

beeny thes of g fromhale?ually, my s been a tive dia-eral own-tax con-

r various spect this ost people,

e of the typi-seeing. It is

eral owner toto understand will owe.

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mmon types of or-paid to a lessor ome, lease bo-times referred royalty), delay

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casionally, working interest i

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ample, have bbe a nontaxof capital toof applicablIt is tricky diffi cult tothis type from otheheld to beticularly inanticipatofor damag

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We are beginmore sales of rto pipeline comwant to run many South Tes to transporals. The sale oble asset suchalso qualify acapital asset.

What areways to m

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ERIK REYNA / SABJ

www.sanantoniobusinessjournal.com PERSONAL FINANCE: MONEY MANAGEMENT & TAX PLANNING MARCH 2, 2012 27

TAXES: High-income individuals taking advantage of current estate tax exemptionsrequirements could result in more severe penalties than in the past, Julia Norton, core tax partner with the San Antonio of-fi ce of BDO, says.

“It’s not just civil penalties such as fi nes; now it can mean possible criminal charg-es,” Norton says. “For example, the IRS is going after taxes and disclosure of big de-posits in foreign accounts, but what about families here in San Antonio that may have co-signed on an account with relatives in Mexico? They’re going to be subject to all kinds of new scrutiny, and I think some of the new fi nes are draconian.”

Another new twist on 2011 tax reporting: Income that businesses received through credit and debit card transactions will be reported to the Internal Revenue Service starting in the year 2011.

“Another new thing that

people need to be aware of is that credit card c o m p a n i e s

are now required to report certain credit card receipts directly to the IRS,” Norton says. “Then it’s going to be IRS comput-ers, at some point, crunching the numbers against your tax return. So you had better double-check those numbers and make sure everything is being reported correct-ly because the IRS is going to have much more of a paper trail.”

Being proactiveHigh-income individuals should consid-

er taking advantage of the tax breaks that currently exist. The reason: As the nation prepares for next fall’s elections, the future of the entire tax system is highly unpre-dictable.

John A. Poteet Jr., CPA with Lang, Poteet & Co., says the standoff between Demo-crats and Republicans has prevented any law changes since 2010 that affect 2011 Form 1040.

“But many of those laws that provided various types of deductions from taxable income — or direct credits against feder-al income taxes — expired as of Dec. 31,

2011,” Poteet says. “So it’s highly questionable if many — or any — of those benefi ts to taxpayers will end up be-ing extended for years after 2011.”

Indeed, anticipated chang-es in capital gains, estate and gift taxes are causing some high-income individuals to take action rather than wait-ing to see what the outcome of the November elections

brings, Norton says.“If you’re a business owner, now may

be a good time to sell,” Norton says. “I had one client who sold his business in 2011 to take advantage of the 15 percent capital gains tax. Some people are converting regular IRAs into Roth IRAs so they can pay taxes at rates that might be lower than in future years. It’s much more diffi cult to predict what’s going to happen with taxes.”

Under current estate law, each per-son has a $5.1 million exemption that may be used to transfer wealth, either during a person’s lifetime or at death. A 25 percent maximum tax rate is im-posed on transfers in excess of the ex-emption. In 2013, the unifi ed estate and gift tax exemption will be reduced to $1 million, and the tax rate will increase to 55 percent. The annual gift tax exclu-sion remains at $13,000 per donee.

But people of all incomes should be aware of deductions and credits that may change or disappear in 2012. Law-makers failed to extend many popular tax breaks that ended with 2011, including write-offs for state sales taxes and deduc-tions for college tuition. The energy credit for home improvements like insulated win-dows and effi cient air conditioning has run out. You can claim up to $500 for 2011, but not if you claimed $1,500 previously. Also in doubt is the limited write-off for mortgage insurance premiums.

Parents with children can get a credit of $1,000 per child, but it’s slated to be cut in half to $500 in 2013. And after 2012, two married people probably will have a lower deduction than single people, so a married

couple could end up owing more tax than two singles with about the same combined income.

However, the recent passage by Con-gress of the “Middle Class Tax Relief and Job Creation Act of 2012” is estimated by the Joint Committee on Taxation to affect approximately 170 million wage earners and self-employed individuals, each receiv-ing an estimated $1,000 increase in take-home pay in 2012.

DAN R. GODDARD is a San Antonio freelance writer.

FROM PAGE 21

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reported to the Internal Revenue Servicestarting in the year 2011.

“Another newthing that

people needto be awareof is thatcredit cardc o m p a n i e s

‘I THINK SOME

OF THE NEW

FINES ARE

DRACONIAN.’Julia Norton

Core Tax PartnerBDO, San Antonio

COURTESY OF PADGETT STRATEMANN & CO.Padgett Stratemann’s Dana Gasparek says the IRS is seeking more detailed information on various income reported on Form 1099.

28 MARCH 2, 2012 PERSONAL FINANCE: MONEY MANAGEMENT & TAX PLANNING www.sanantoniobusinessjournal.com

How does divorce affect federal tax fi lings? As Texas is a community proper-ty state, the tax return for each divorced spouse in the year of divorce must allo-cate income, deductions, tax payments, tax withholdings, etc. equally for the period that these items were incurred before the divorce is fi nal, which date is generally the date stipulated on the di-vorce decree. There is no allocation of these items after the date of divorce. Al-locations for the time period before and after the divorce can be different if there

is an agreement between the divorcing spouses for such a different allocation. This agreement should be in writing and part of the divorce documents. Different allocations from a straight equal alloca-tion for items earned or paid before the divorce date can benefi t the divorcing spouse that considers this point. The exemption for children is not split and is claimed by one divorcing spouse solely. This should also be clearly addressed in the divorce decree.

What tax problems, penalties and fi nes do individuals usually encoun-ter during and after a divorce? While the divorce process is occurring, taxpay-ers may not have an understanding of the tax consequences until much later, this leaves the potential for underpayment penalties. The IRS requires payment of estimated taxes on a quarterly basis.

With the divorce settlement, a divorc-ing spouse may not be aware of the tax consequences that could result from the settlement. This can lead to more taxes than the divorced spouse had expected. And this can result in much heavier pen-alties and interest for failure to pay the taxes due by April 15th. Also, the types of assets divided in a divorce settlement can lead to future unexpected tax and fi nancial consequences. For example, if a divorcing spouse takes an IRA ac-count worth $1 million while the other divorcing spouse takes raw land worth $1 million with an original cost of $1 mil-lion, then the IRA when withdrawn pre-maturely may cost taxes and penalties of $450,000 while the sale of the raw land would have no tax at all.

Tactics individuals going through a divorce can do to shield themselves from problems and unnecessary penalties? The key is always to avoid surprises which come from a lack of professional guidance and planning. Planning and negotiating the division of the community property assets must include understanding the po-tential tax consequences from a liqui-dation or sale of that asset later (even if no sale is ever contemplated). Parties also must know whether that asset has debts or other legal obligations such as use as collateral on other assets. Just because divorcing spouses agree on a division of the assets does not mean creditors of the spouses will also agree. Finally, make sure it is clearly spelled out the responsibility each di-vorcing spouse has for gathering tax and fi nancial data, for sharing that data and for fi ling tax returns with payment of the taxes due.

Is there anything couples can do on the front end to protect themselves from these issues? If there are sub-stantial assets held by either one of a couple contemplating marriage, a pre-nuptial agreement that spells out the separate property assets can be help-ful should there be a divorce later. A dispute could lead to disagreement on who is responsible for taxes related to that asset — and ultimately — penalties, interest and additional taxes for failure to pay the taxes timely. A couple should have a clear understanding of who is re-sponsible for maintaining tax and fi nan-cial data needed to prepare tax returns and support deductions taken. Failure by both spouses to keep adequate re-cords can lead to substantial penalties, interest and taxes should the IRS audit their tax return. Knowing the fi nancial and tax history of the future spouse be-fore marriage can help plan to minimize the future fi nancial and tax matters of the married couple.

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TRENDS | Think divorce is tough on your heart and soul? Just wait until it’s time to file your tax return.

Think divorce is tough on your heart and soul? Just wait until it’s time to file your tax return.

How does divorce affect federal tax fi lings? In the year of divorce, the par-ties no longer fi le jointly if the divorce is fi nal on or before December 31 of that year. Even if the divorce is fi nal on the last day of the year, then the parties are considered single (or head of household if they qualify) for the year. Income and deductions in a community property state are allocated to the parties accord-ing to complicated rules for the period of the marriage only, and then separately to each party based on his or her own in-come and deductions after the marriage. Each party in the year of the divorce becoming fi nal then reports their own income and deductions, along with tax payments, allocated for the period prior to the divorce, and all of their own after

the divorce is fi nal. They become two tax-payers again. Just because taxpayers are going through a divorce that isn’t fi nal at year end, doesn’t mean that they can fi le their own return and just claim their own income and deductions. In fact, in a com-munity property state, that’s wrong and not allowed. They must fi le as married fi l-ing jointly OR allocate income and deduc-tions during the pendency of the divorce and fi le as married fi ling separately.

What tax problems, penalties and fi nes do individuals usually encoun-ter during and after a divorce? The problems primarily relate to allocations of income and deductions during the period of separation — but prior to the divorce being fi led; also true for the pay-

ments that have been made. One party might not get allocations of estimated taxes or withholding and thus might be-come subject to penalties if the parties aren’t paying attention to these aspects during the pendency of the divorce.

Tactics individuals going through a divorce can do to shield themselves from problems and unnecessary penalties? The major thing: Individuals

in this situation need to discuss the vari-ous tax aspects with a qualifi ed tax profes-sional — I just can’t mention that enough — who understands the tax aspects of community and separate property, and the rules for allocation of income, deduc-tions and payments.

Is there anything couples can do on the front end to protect themselves from these issues? The key aspect “on the front end” is to understand any tax issues that already exist prior to mar-riage. That’s one of the critical questions to ask before marriage. If one party has tax liens, unpaid taxes, or has failed to fi le, there are substantial risks to the new spouse and his/her in-come and assets. There may be reasons to get a prenuptial agree-

ment and/or a partition of income or as-sets and liabilities prior to marriage to shield an individual from unwanted and undesired liability exposure. Further, after marriage, a postnuptial agreement can be drawn up to cover items as prop-erty or debts and create a benefi t to the marriage. Utilizing a neutral qualifi ed tax professional (yes, I said it again) can assist current married couples solve dif-fi cult decisions. Finally, if a fi rst or next marriage is being planned, remember plan, plan and plan some more… and consult a qualifi ed tax profes-sional.

BY TAMARIND PHINISEE

As the divorce rate continues to climb in this country, the necessity for education about how marital

splits can affect taxes is important. Data from the U.S. Census Bureau’s American Community Survey, shows that the di-

vorce rate for men rose from 9.2 percent in 2007 to 9.4 percent in 2010. That same rate increased for women from 12.0 percent to 12.5 percent during the same period.

Tax professionals say that without the proper knowledge and help from tax profession-als, individuals could fi nd themselves buried under unexpected penalties and fi nes. With tax day just around the corner, a few local accountants took some time to chat with the Business Journal about how tax fi lings are affected by divorce and what individuals can do before, during and after to minimize possible tax issues that may arise.

■ Trish Fritsche, CPA, CFF, CITP

Senior manager in Forensic and Litigation ServicesWeaver LLPweaverllp.com

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■ Jim Rice, CPAShareholderSol Schwartz & Associates P.C.ssacpa.com

www.sanantoniobusinessjournal.com PERSONAL FINANCE: MONEY MANAGEMENT & TAX PLANNING MARCH 2, 2012 29

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How does divorce affect federal tax fi lings? In the year before the divorce is fi nal, the couple may choose to fi le a joint return or, each spouse may fi le as “married fi ling separately.” Alterna-tively, if certain requirements are met, a spouse may fi le as “head of house-hold.” Generally, the married-fi ling-sep-arately fi ling status produces the most unfavorable tax results. For the year in which the divorce is fi nal, and for each year thereafter until remarried, each former spouse must fi le as “single” or, if qualifi ed, he or she may fi le as head of household. A joint return may not be fi led for the year in which the couple is unmarried at the end of the year.

What tax problems, penalties and fi nes do individuals usually encoun-ter during and after a divorce? Tax issues may arise if a couple fi les their tax return using the “married fi ling jointly” status for a year before their divorce is fi nal. While this fi ling status may result in overall lower tax, it may put one spouse at risk for unpaid tax, penalties, and interest obligations of the other spouse. Spouses are jointly and individually liable for amounts due on joint returns. This is true even if the divorce decree relieves one spouse of that responsibility.

Thus, even after a divorce, the IRS may pursue collection efforts against one spouse for the obligations in-curred by the other spouse if a joint return was fi led in a year before the di-vorce was fi nalized. However, in some cases, a spouse may claim “innocent spouse relief” to request release from the other spouse’s liabilities.

Tactics individuals going through a divorce can do to shield them-selves from problems and un-necessary penalties? Divorcing individuals should become familiar with the tax rules applicable to their situation, especially if children are involved or alimony is being contem-plated. Each spouse should consult with a tax adviser about their specifi c circumstances. Then, the tax adviser should work with the divorce attor-ney to review the tax implications of a proposed property settlement. The team also should review tax provi-sions in the divorce decree to protect the individual from unintended conse-quences. In addition, IRS Publication 504, Divorced or Separated Individu-als, contains useful tax information and should be reviewed.

Is there anything couples can do on the front end to protect them-selves from these issues? Each couple should gain information about how tax and other laws may affect them. For example, special rules apply to married couples living in Texas, a community property state. Under Tex-as state law and the federal tax rules, unless a separate property agreement is in place, income earned during mar-riage by either spouse is considered community income of both spouses.

Thus, each spouse shares equally in the tax liability for that income. If that re-sult is not desired or there are separate property concerns, a pre- or post-nuptial agreement should be considered.

It is also important to keep good re-cords. Copies of tax returns and sup-porting records should be retained. Documents with continuing tax sig-nifi cance, such as the cost of property, will be important when the property is later sold or becomes part of a divorce settlement and should be retained in-defi nitely. Divorcing individuals should each get copies of previously fi led joint tax returns and related records.

How does divorce affect federal tax fi lings? Your fi ling status is deter-mined as of December 31st. Therefore — even if you are separated for the ma-jority of the year — if the divorce is not fi nalized, you must fi le as a married fi l-ing jointly or married fi ling separately.

There is an exception that allows you to fi le as head of household, but addi-tional qualifi cations must be met.

What tax problems, penalties and fi nes do individuals usually encoun-ter during and after a divorce? If the divorce proceeding are contentious and information is not being freely shared, there is potential for incorrect fi lings. This can result in the deductions being later disallowed, and the under report-ing of income penalties.

Tactics individuals going through a divorce can do to shield them-selves from problems and unnec-essary penalties? Communication! While possibly unrealistic between the husband and wife, the profession-als they employ (CPAs and attorneys) need to facilitate the sharing of infor-mation to prevent the incorrect report-ing of information. The divorce decree needs to address who fi les in the fi nal year of marriage, and who is respon-sible for prior years’ tax matters. The

couple should consider the nature, and potential tax consequences when divid-ing up community assets:

• The potential for the gain on the sale of a homestead may become tax-able; and

• Tax effects of a pension plan, IRA, or other deferred account.

Is there anything couples can do on the front end to protect themselves from these issues? When discussing separate property you need to consider both the management and income re-lated to the assets. A prenuptial agree-ment may be appropriate if substantial assets exist prior to marriage.

■ George C. “Chris” WilliamsPartnerWilliams, Crow, Mask LLPwcfcpas.com

■ Susan Hammond, CPA, CFP Tax Senior ManagerPadgett Stratemann & Co.padgett-cpa.com

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