There are many ways a spouse can uncover secret financial dealings. A suspicious spouse might go through their partner’s web surfing history and social networks to uncover traces of hidden bank accounts and business deals. Some may even install software that records every keystroke their spouses make. Among the wackier tactics include replacing spouse’s GPS with a nearly identical one, allowing tracking of the vehicle’s location and even pictures of who’s sitting in the front seat. Smartphones, as well, are playing an increasingly large role in discovering hidden assets. Mr. Lewis, a data forensic expert in New York, says he recently worked on a case where the spouse enabled the “find my phone” software on all of her family’s smartphones, and quickly learned of her husband’s frequent trips to an ATM, where he withdrew cash she didn’t know about.

In addition to suspicious spouses, divorce lawyers and forensic experts are employing new strategies of their own. Advanced search tools allow them to analyze thousands of digital bank statements, credit card bills and other files in the blink of an eye. “While in the past a paper trail might be hidden by a second set of books or the shredding of documents, the trail left by files on a computer is etched onto a hard drive somewhere, just waiting to be discovered” says Ken Altshuler, president of the American Academy of Matrimonial Lawyers.

While the new spying tactics are effective, a somewhat cloudier issue is whether it is legal for a spouse to use them, as the law is still evolving. It’s legal to google anyone, but it could be potentially illegal to hack a spouse’s personal password-protected smartphone or Facebook page, or to secretly install a GPS or a keystroke monitor. A person who uncovers information illegally could lose all credibility in court, and his attorney may not be able to present any evidence on that issue. In addition, the person could go to jail, while the lawyer could face fines or lose his license if caught using illegally obtained evidence. Caution should be very much in order.

To view the template, click here: Employee Vs Independent Contractor Status

Tax Records

Supporting documents, such as 1099’s, W-2’s, receipts for charitable contributions, etc. should be kept for 3 years after the return was filed or the due date, whichever is later. For example, the documents for your 2011 return filed March 1, 2012 should be retained until April 15, 2015. Note that if your 1099 is attached to a brokerage statement that shows evidence of the purchase cost of a financial asset it’s critical to hold onto the statement until you dispose of that asset.

As for the tax returns themselves, it’s a good idea to save them forever. They may be needed for Medicaid, immigration, pension, divorce and other purposes. They may also contain useful data in filing future returns.  At a minimum we recommend retaining them for 10 years.  Certain items on a tax return affect later years and need to be kept until the statutes of those later years’ tax returns expire. For example:

• basis of depreciable property i.e. rental property or portion of home rented out or used for business
• Section 1231 losses
• elections to capitalize real estate tax and other carrying costs
• amounts of IRA and pension contributions that were not deductible  for NJ

Statute of Limitations Summary – Individuals

3 year – This is the general statute of limitations on IRS assessments. It begins to run the later of the due date of the return and the actual filing date.

6 year – Omissions of more than 25% of gross income are subject to a 6 year statute

10 year – This is the time the IRS has to collect (as opposed to assess) tax due.

Unlimited – There is no statute of limitations for fraud and for non-filers.

So the expression, “when in doubt, throw it out” may be suitable when cleaning out your clothes closet. But when cleaning out tax records, “when in doubt, don’t throw it out.”

In Estate of Muscle v. Director, Peter Muscle, an 88 year old New Jersey resident, transferred PSE&G shares valued at a total of $1,038,947 to Linda Jackson, a girlfriend with whom Peter had a longstanding relationship but never lived with. Over the years Linda had constantly asked Peter to marry her but because of a previous bitter divorce Peter fiercely resisted the idea. Finally, in 2006, Peter agreed to purchase a property together with Linda and move in together, but did not yet agree to get married. In 2007, Linda met with James DeMartino, an attorney knowledgeable in the area of eldercare, wills, and estate planning. He suggested that Peter gift Linda the PSE&G stock, saying it would not only be beneficial for tax purposes but for Medicaid eligibility as well, for which there is five-year look-back period (no gifts can be made within 5 years of application). After Mr. DeMartino met with Peter, Peter gifted her the stock and told Linda that he was finally ready to “make it legal” which he clarified meant to get married. As of that moment, Peter never conveyed any concerns to Linda about death. Peter died on January 4, 2008, less than six months after the transfer of stock. After his death, the Director of Taxation demanded that the value of the stock be added to the estate and therefore included in the inheritance tax. The reasoning behind the Director was that as a result of The New Jersey Transfer Inheritance Act there is a presumption that a gift made by a decedent during his life is taxable as a testamentary substitute if made in “contemplation of death”. The statute requires the State to consider four essential facts: (a) a transfer occurred; (b) there was no adequate consideration; (c) the gift was a material portion of the decedent’s estate; and (d) the gift occurred within three years of the decedent’s death. If these facts exist, the burden of proof is shifted to the recipient, to show that the gift was not made in contemplation of death.

Linda challenged the Director’s determination with two arguments. First, she claimed that the stock was an engagement present and was therefore not in contemplation of death. Furthermore, she pointed out that a motive of the gift had been for Medicaid purposes to qualify with a five-year look-back, which would imply that Peter expected to live at least 5 more years.

The Tax Court ruled in favor of the Director, maintaining that unless it can be factually proven otherwise, a gift meeting the 4 requirements of the statute is deemed “in contemplation of death”. It pointed out that “contemplation of death” is not limited to its literal meaning, rather the test in New Jersey is whether, regardless of “the existence of any life associated motives,” the decedent had an “impelling motive to make a present disposition in lieu of a testamentary disposition”. As for Linda’s arguments, the Court decided that because Peter only made the gift subsequent to meeting with an elder-law attorney it indicated that his motivation was for tax purposes. As for the 5 year Medicaid look-back   argument, the Court deemed it irrelevant since the only requirement for taxing a gift is the presence of an impelling motive to avoid inheritance tax, regardless of other motives.

You pat yourself on the back for your clever move until the following January. January is 1099 time and you get a 1099-C from the bank stating you have $500,000 of cancellation of debt (COD) income

Your cronies at the club tell you that you have to pay US and NJ income tax on the $500,000 at ordinary income tax rates, not the favorable capital gains rates. You calculate that your brilliant move will cost you $200,000.

HELP!

Don’t despair. It’s not nearly as bad as you think.

1. You didn’t notice the additional information on the 1099. It says the fair market value (FMV)of your property is $350,000. The cancellation of debt income is the debt forgiven less the FMV of the property relinquished, so your COD income is only $150,000
2. You have an additional item to report on your tax return, the “sale” of the property. You are deemed to have sold the property to the bank for its FMV. You have gain (loss) for FMV less basis. (Basis is purchase price, improvements, and fees at closing less cumulative depreciation taken). Let’s say you paid $600,000 for the property, put in $25,000 of improvements and $5,000 of fees.  In the 10 years you owned the property you took a total of $150,000 of depreciation. Your basis is $480,000. Subtract that from the FMV of $350,000 and you have a loss of $130,000 to offset some of that COD income.
3. It is very common for rental properties to generate losses. Often these losses are suspended due to the passive loss rules. In the year you dispose of the property you deduct all of the suspended losses. For example, you could easily have $100,000 of passive losses that directly offset your $150,000 of COD income.

So before you decide to listen to your all-knowing friend who majored in Political Science and jump off the nearest bridge, consult with a competent accountant to determine how much you really owe.

1. Support Requirement – You must provide over half the person’s support for the year
2. Relationship Requirement – If the person doesn’t live with you the entire year, he must be one of the following:
   1. Child, Stepchild, adopted child or descendent of your child
   2. Brother, brother-in- law, stepbrother or half-brother
   3. Sister, sister-in-law, stepsister or half-sister
   4. Son-in-law or daughter-in-law
   5. Father, stepfather or father-in-law
   6. Mother, stepmother, mother in law
   7. Aunt or uncle
3. Citizen or Resident Requirement – The supported person must be a U.S. citizen, a U.S. resident alien, a U.S. national, or a resident of Canada or Mexico
4. Same Household Requirement (only for those who fail the relationship requirement) – The supported person must live with you in the same household.

Now that your unemployed daughter and son-in-law have moved back in with you, you may enjoy more than just the pitter-patter of your grandchildren’s steps.

You may enjoy numerous tax benefits.

Tax Records

Supporting documents, such as 1099’s, W-2’s, receipts for charitable contributions, etc. should be kept for 4 years after the return was filed. For example, the documents for your 2011 return filed April 17, 2012 should be retained until April 16, 2016. If you will file on extension by October 15, 2012, you should hold on to your documents until October 14, 2016. Note that if your 1099 is attached to a brokerage statement that shows evidence of the purchase cost of a financial asset it’s is critical to hold onto the statement until you dispose of that asset.  

As for the tax returns themselves, it’s usually a good idea to save them forever. They may be needed for Medicaid, immigration, pension and other purposes. They may also contain useful data in filing future returns. At a minimum we recommend retaining them for 10 years.

Original Documents You Should Keep Forever   

• All versions of your living trust
• Wills and Durable Powers of Attorney
• Healthcare Advance Directives
• Birth Certificates
• Citizenship Papers
• Medical Records
• Marriage, Adoption,  and Divorce papers
• Social Security Card

Electronic Storage – A Great Option

Before you go crazy trying to find space in your already overflowing file cabinets, be aware that many documents can be stored electronically and subsequently shredded. While some documents should be stored in a safe deposit box, for many (including financial records and tax returns) electronic storage is an easier, more convenient option.

Contributing to a traditional IRA reduces your federal income and, as a result, when you take a distribution down the road it’s fully taxable. While the distribution is fully taxed on the federal level because of this previous tax benefit, what many overlook is the fact that the distribution is not necessarily fully taxable to New Jersey. When the contributions to the traditional IRA were made, they were not deductible for NJ.

Want To Give Christie a Gift?

As a result, unless you would like to give Governor Christie some extra cash there is no reason to pay NJ tax on the return of your original contributions. Let’s illustrate this with an example. Suppose John contributed $5,000 a year to his IRA for 5 years (a total of $25,000). Many years pass, and he decides to take a distribution, when his IRA account has grown to $100,000. The entire balance is subject to federal income tax. The State of New Jersey, however, only requires that tax be paid on the amount exceeding the $25,000 contributed. Taxpayers who unknowingly pay state tax on the entire distribution will never see that money again unless they amend. Their only consolation would be that they’ve helped chip away at the state budget deficit.

To Whom Does This Pertain?

Some of the most common types of accounts that this difference applies to are:  traditional IRAs, KEOGH plans, and 403(b) plans.  The contributions to all of these accounts are deducted on the federal level but not on the NJ state level, resulting in NJ state tax savings when taking a distribution.

Three Times in Life When This Would Become Relevant

There are three common scenarios in which this rule would affect a taxpayer. The first is if the taxpayer has reached retirement and begins taking distributions from his traditional IRA. A second scenario would be if one makes a conversion from a traditional IRA to a Roth IRA (when one converts to a Roth IRA the entire account is taxed on the federal level). A third occasion would be if a taxpayer were to fall on hard times and decides to prematurely withdraw from his traditional IRA. Before you file your 2011 income taxes, make sure that you are not overpaying your NJ income taxes.

Be Sure To Maintain Records

Often IRAs are transferred through many financial institutions over the years and it can be difficult to determine the portion attributable to your contributions (as opposed to growth of the funds contributed). The key to keeping NJ’s claws off your money is to maintain a record of the portion contributed to your traditional IRA accounts, Keogh plans and 403(b) plans.

First, there will be a new “failure-to-pay penalty relief” for two categories of taxpayers:

• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year
• Self-employed individuals who experienced a 25 percent or greater reduction of business income in 2011 due to the economy

Under this new relief, taxpayers can avoid the failure-to-pay penalty until Oct. 15, 2012.To be eligible the taxpayer’s income must not exceed $200,000 for a joint return or $100,000 for a single or head of household return. Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A in order to obtain the 2011 penalty relief.

In addition, there is a new provision that raises the threshold to $50,000 for using an installment agreement to pay back taxes without having to supply the IRS with a financial statement.The previous threshold had been $25,000. Taxpayers seeking installment agreements exceeding $50,000 will still be required to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F).The maximum term for installment agreements has also been raised to 72 months from the previous 60-month maximum. To set up an installment agreement with the IRS, go to the On-line Payment Agreement (OPA) page on IRS.gov and simply follow the instructions.