The Minnesota Family Law Podcast · 2021-07-08 · 26 min
Key moments - from our scoring
Substance score
61 / 100
Five dimensions, 20 points each
This episode addresses three major tax developments affecting Minnesota family law practitioners. Karen Krita explains the 2021 child tax credit expansion - up to $3,600 per child under 6 and $3,000 for ages 7-17 - with different phase-out thresholds than the original $2,000 credit, plus the new advance monthly payments starting in July. The IRS has created accessible tools on IRS.gov for eligibility calculation and payment tracking, with an opt-out option for complex custody situations. Tom Harges covers Minnesota's new tax bill, which conforms PPP loan forgiveness and unemployment income tax treatment to federal law, retroactively allows Section 179 depreciation deductions back to 2018, and introduces an entity-level workaround for the $10,000 state and local tax deduction cap - a strategy other high-tax states are exploring. The Schmidt Court of Appeals case establishes that trial courts must properly account for income taxes and payroll deductions when calculating support obligations, overturning prior decisions that divided gross income by 12 without tax recognition. The hosts also discuss tax fraud in family law cases, cash business underreporting, and creative deviation from support formulas to match actual child expenses with specific payments.
The expanded credit phases out at $150,000 for joint filers, $112,500 for head of household, and $75,000 for single taxpayers - lower than the original $2,000 credit which phased out at $400,000 joint. Children under 6 get up to $3,600 and ages 7-17 get up to $3,000.
Starting in July 2021, the IRS sends monthly advance payments equal to half of the eligible credit through December, with the remaining half claimed when filing the 2021 tax return. Eligible families can check their eligibility and opt out using IRS.gov calculators.
Minnesota's new 2021 tax bill conforms to federal treatment: PPP loan forgiveness is tax-free and expenses paid with forgiven amounts are not deductible, resolving prior uncertainty. The Department of Revenue is amending returns for affected taxpayers who added back these amounts.
The Schmidt decision requires courts to account for income taxes and payroll deductions when determining support obligations, rather than simply dividing gross income by 12. Courts cannot ignore tax liability when comparing income to a spouse's monthly budget.
Entities can now pay state and real estate taxes on behalf of owners, deducting these amounts against entity income rather than the individual's personal return, allowing owners to avoid the $10,000 cap that applied under 2017 federal tax law changes.
Our reviewer’s read on each dimension, with quotes from the episode.
The episode covers several substantive topics (child tax credits, PPP conformity, state tax deductions, Schmidt case) with moderate depth, but much of the content is explanatory overview rather than novel or contrarian insight. The discussion of tax credit phase-outs, IRS tools, and recent legislative changes provides useful reference material for family law practitioners, but limited truly non-obvious takeaways. Some practical gems exist (e.g., entity-level tax strategy workaround, matching child support to actual expenses) but are brief.
The original tax credit before 2021 was $2,000 maximum per child, limited to you had to be under age 17 as of the end of the tax year. So if you are 6 and under, the additional credit is 1,600 for a total of, uh, $3,600 per child.
there's a workaround at an entity level where they're allowing for the state taxes to be claimed against those entities income to reduce the taxable income and not have that affect the $10,000 limitation at the individual level.
The episode mostly synthesizes and explains existing policy and recent legislative changes rather than presenting original or contrarian analysis. The speakers confirm conventional family law practice (considering taxes in support calculations) and restate IRS guidance. The entity-level tax deduction workaround is somewhat novel for Minnesota but is presented as a known strategy other states have explored, not a fresh insight.
Now, for purposes of doing calculations for support. And when we're looking at gross incomes for individuals, all the software, all of the schedules the experts prepare are always considering taxes.
there certainly have been a number of states exploring similar ways of handling this, trying to get the deduction at a entity level.
Both guests are credentialed financial professionals with direct family law experience (Karen Krita and Tom Harges described as 'top financial professionals'). Karen explicitly states 22 years in family law and nearly 40 as a CPA, suggesting real practitioner depth. However, the transcript provides no titles, firm names, or evidence of their specific scale of impact or deal size, limiting assessment of true seniority.
our guests are, uh, Tom Harges and Karen Krita, um, both two of our top financial professionals.
I've been a CPA for just about 40 years. I've been doing family law for 22 of that.
The episode includes specific numbers (tax credit thresholds: $3,600 for children 6 and under, $3,000 for ages 7-17; phase-out limits: $150,000 for joint filers; $10,000 SALT cap; $1,000 child expense example). It references specific legislation (Minnesota 2021 tax bill, Schmidt case) and IRS tools. However, most evidence is generic regulatory detail rather than real case examples or concrete outcome data. Few client stories, business examples, or quantified impacts are provided.
If you are 6 and under, the additional credit is 1,600 for a total of, uh, $3,600 per child. If you are between 7 and 17, you get an additional thousand dollars or a total of $3,000 for the credit.
For a joint return you could have adjusted gross income of 400,000 and still qualify for the credit. And um, there was another phase out of 200,000 for head of household and single.
The host (Tom Tuft) asks reasonable follow-up questions and shows genuine curiosity (e.g., "Is this something you're running into questions about?", "Have other states tried this?"). However, follow-ups are often shallow; he rarely challenges claims or probe deeper into contradictions. The conversation feels collegial but lacks the sharp, probing questions that would elicit richer insight. No productive disagreement or skepticism surfaces.
So it's, I mean it's a stimulus. I mean that's one of the goals. It sounds like.
Is this. I was just going to ask. Is this. Is. Have other states tried this? I mean, as far. I mean, I don't know if you know that, but has that been done before?
Computed from the transcript - who did the talking, and the words that came up most.
Karen Kritta and Tom Harjes join Tom Tuft to discuss advance payment of Child Tax Credit and the recently passed Minnesota tax bill that includes deduction for PPP-related expenses and other changes relevant to family law matters. In addition, they discuss the newly decided Schmidt case that confirms the necessity of using NET income to determine whether a party can meet their needs.
Transcribed and scored by The B2B Podcast Index.
Speaker A: M hello and welcome to the Minnesota Family Law Podcast. I'm Tom Tuft. I'm family law attorney and ADR provider at the law firm of Tuft, Tuft, Lock, Jarabik and o'. Connell. And this is the annual or annual, the weekly podcast for family law professionals, uh, where we bring together, um, often guests, uh, who are especially knowledgeable about the things we deal with. And that's especially true this week, um, because our guests are, uh, Tom Harges and Karen Krita, um, both two of our top financial professionals. And it's especially relevant right now because I, I know the buzz amongst the family law attorneys is how we're dealing with, uh, the child tax credit issue, uh, and the advanced, uh, payment of the credit. And that's all new stuff. It's still in development, but we have the right people here to talk about it. Um, and so Karen's going to take the lead on that and then, uh, we're going to move into some other stuff around the recently passed Minnesota, um, budget and tax bill. And Tom is largely going to talk about that. And then we'll talk about the relatively, uh, hot off the presses from June, uh, the Schmidt, uh, case. Um, before we go there, I want to just mention that we just got an alert, uh, from, uh, uh, someone who works for the federal government and said there's a very serious concern about LinkedIn and they're selling, uh, addresses and they're. The Office of Comptroller of the Currency is encouraging everyone to change their address. Are there passwords, uh, on LinkedIn? Because, uh, they're being sold on the, uh, black Web. So that's one little announcement I promised to make. Um, but now I guess we'll shift gears. Um, Karen, let's talk about this child tax. Cool credit, advance payment. Uh, what's going on with that?
Speaker B: Well, I think everybody knows by now that in 2021, so far only we have some, um, additional tax credits that are available for kids that are now under the age of 18 as of the end of the year. The original tax credit before 2021 was $2,000 maximum per child, limited to you had to be under age 17 as of the end of the tax year. So if you are 6 and under, the additional credit is 1,600 for a total of, uh, $3,600 per child. If you are between 7 and 17, you get an additional thousand dollars or a total of $3,000 for the credit. And because the tax laws are complicated and don't make sense, often there's two sets of rules that go um, with those two tiers of credit. The original $2,000 credit had limitations on um, it that were pretty generous. So for instance on um, a joint return you could have adjusted gross income of 400,000 and still qualify for the credit. And um, there was another phase out of 200,000 for head of household and single. So again that pertains to the first 2,000 credit or the old credit for the 2021 additional credit. The phase outs begin earlier. It's $150,000 for a joint return, 112,500 as had a household and 75,000 for a single taxpayer. So that's just sort of how the credits work in a nutshell. There's talk about extending them next year. We'll see. I think. Okay.
Speaker A: It sounds incredibly uh, I mean it's pretty intricate it feels like. And are the rules still being. Is this all new data that they're just sharing with us or um, has this been percolating for a while?
Speaker B: Well, this has been out now since the beginning of the year, the end of last year, beginning of this year. Um, what I think people are focusing on right now is part of the credits are going to be refundable this year. They're calling it advance payments. So what they're doing for eligible people is actually starting this month in July. And each month between now and the end of this year, you will get a check for half of your eligible credit amount per child between now and the rest of the year.
Speaker A: So it's, I mean it's a stimulus. I mean that's one of the goals. It sounds like.
Speaker B: Uh, yes, it's to put money in parents pocket and you know, you have to wonder if this is going to help with people getting back to work that have had concerns about paying for childcare and things like that. It'll be interesting to see what the impact of this is because it can be pretty significant amounts for a family.
Speaker A: Um, and so Tom, are you seeing this? I mean has this come up? I'm just seeing a lot of buzz about it on the AML listserv and the Famula League. There's just some discussion. I'm just uh. Is this something you're running into questions about this at this point?
Speaker C: It certainly is coming up. Um, I think because it might be short lived in just the year 2021 and most of the time when we're running our cash flow models, we're looking at a more longer term approach and then we're reverting back to what the typical credit is. But it is something that people are very interested in knowing more about. For this particular year.
Speaker B: There's some confusion about the advance payments and who qualifies. Uh, there are some really good tools that the IRS has set up. On the IRS.gov uh, website, there's calculators to, you can go in and determine your eligibility. You can go in and calculate the actual credit that if you are eligible, that you will be getting. Um, you can see how much the payments are, um, on, um, the total credit that you have available. You can also update information. So there's problems if there's a number of people that don't have to file a tax return. For instance, they don't have enough income and so they're not required to file. There's people that, um, haven't filed 2020 returns and there's information on, um, how to put that into the system that they have set up. It's actually pretty good if you go look at it. Um, a lot of the IRS systems are antiquated, but it seems like they've done a pretty good job of setting this up and it's easy to navigate through the programs. There's also an option to opt out of the advance payments. And for some family situations, it might be less confusing to opt out if there's questions about, for instance, if you have someone gets the exemption one year, someone else gets the exemption or the child tax credit eligibility on, um, every other year basis. So it's going to be based on 2020 information. If you filed 2020, they're going to send the money to a bank account if that banking information is on, um, that 2020 return. If it's not, they're going to be mailing checks or mailing, um, cards out, uh, to people, preloaded cards. So you have an option to go in, see where you're at, get things set up, possibly elect out, um, and taking those steps for a lot of parents and checking it out ahead of time is probably a wise idea.
Speaker A: So I'm glad to hear. So this is pretty accessible for regular people. It sounds like, um, you know, you don't need to have a tax expert, um, to at least, you know, do the run through the IRS website and kind of sort things out so well.
Speaker B: And if things get messed up, there's a process in place to settle up when you file your 2021 tax return. And if they overpay you for some reason, you. There's also a process whereby you don't have to pay back the first $2,000 of the credit because I think they just anticipated that it was going to be messy. So. But there's good frequently asked questions about all kinds of topics. I've got one example, um, um, your screen share here. But it really is helpful and you can click on things and it'll take you through to other related topics. So it is very uh, very navigable website.
Speaker A: That is nice to hear. Um, anything else we need to know about uh, this maybe it's not as complex as uh, it seemed like, but uh, it's kind of a new thing to deal with at least for whatever half a year as far as we know right now. Um, so, um, anything else around the child tax credit that we should talk about, Karen?
Speaker B: I don't think right now, but I mean feel free. If you have questions. I'm sure you can give a shout out to Tom or I and we can help you.
Speaker A: Absolutely, that would be great. Um, so Tom, move into the
Speaker B: tax
Speaker A: uh, bill from the state of Minnesota and the budget bill and you know, what does that mean for the family law attorneys?
Speaker C: Yeah, this is just a week ago in fact, uh, legislature spent late night or early morning as the case may be, passing this recent legislation and then the governor signed the 2021 tax bill. So we now have a 52 page tax bill to review and understand. And um, while it covers a lot of topics, there's you know, some very specific ones that will be more applicable to cases that people are working on. Probably the biggest change or it was anticipated. But this is nice to make sure that we're conforming Minnesota to the federal government's take on the PPP money. So in all that, when those loans were received and if you are receiving forgiveness for them, that's tax free money. And then the government said that the expenses you pay with that you can deduct. Now the state had not officially conformed to that. There was suspicion that they would. But until you actually see the bill signed, you're never sure. So a number of people had filed taxes and added back the expenses that were paid or in some cases the unemployment insurance, which was tax free on the federal side up to $10,200. People would file the returns and have to add that back. Now immediately the day after the bill was issued, the Minnesota Department of Revenue sent out an email and basically said we understand all these changes. We knew they were in the works. We're updating our forms so don't file anything with us until we update our forms and let you know that they are available to use to amend returns. But they did give further guidance for those taxpayers who claimed and added back PPP money or the uh, the expenses that were forgiven. Uh, they didn't get taken as a deduction on the federal side or they claim the unemployment income as an add back. On the state side, the Minnesota Department of Revenue said don't do anything until we contact you. We'll do one of two things. We'll either amend your return for you and you don't have to do a thing and you'll get a refund, or second, if your return is more complex, we'll let you know that you need to recommend it yourself. But don't do anything until we contact you.
Speaker A: I know our accountant had us wait till the last minute to file because he was optimistic that the legislature and, and the governor would sort this out and didn't quite happen.
Speaker B: So a lot of people waited and haven't yet filed.
Speaker A: So
Speaker C: they took their time up until the last minute. But thankfully it did take place. So we can all work with what we have now. So, um, a couple other things that are helpful to mention. In the past couple of years the uh, IRS has allowed some depreciation write offs, section 179 write offs that the state of Minnesota wasn't uh, allowing. And so there were some large add backs that were taking place. So this legislation change actually takes, goes back in time, you know, up until the year 2018. So they'll maybe some people who took those large deductions who would be able to claim other amended returns for earlier years who had that apply to um. Another area was the state and real estate tax combined deduction that was capped at $10,000 for individuals. There's a workaround at an entity level where they're allowing for the state taxes to be claimed against those entities income to reduce the taxable income and not have that affect the $10,000 limitation at the individual level. So more to come on that. But that's a very recent change here that people will be able to utilize going forward.
Speaker B: You know, that's a gift.
Speaker A: So small entities like oh say law firms, um, that struck me as like, well there's something interesting uh, that could happen here.
Speaker B: That's a gift.
Speaker A: A business would pay the tax on behalf of their owners. Um, for example, if I'm hitting a certain example I'm thinking of and then that would reduce the tax liability and you might not have that problem of the cap, ah, on someone's personal return. Am I reading that right?
Speaker C: Think so, yeah. It'll be um, Everyone will be kind of digging into this now to see how that's going to actually, uh, play out. Just because it's brand new and something that's not been done before, at least in Minnesota. I think a lot of high tax states have looked into this as well. So they're trying to alleviate some of the, uh, tax burden that those tax law changes back in 2018, uh, involved.
Speaker A: So is this. I was just going to ask. Is this. Is. Have other states tried this? I mean, as far. I mean, I don't know if you know that, but has that been done before? I mean, this. I know this is all fairly new,
Speaker C: but there certainly have been a number of states exploring similar ways of handling this, trying to get the deduction at a entity level. Whether it's going to be similar or identical to what Minnesota is doing, I'm not sure. But that concept has definitely been looked at by a number of other states.
Speaker B: Yeah. Since 2017, there's been lots of discussion about trying to do workarounds, so.
Speaker A: Interesting. Yeah, I, I know we'll be, I guess all of us will be talking to our accountant at the end of the year, maybe more than usual.
Speaker B: Well, you probably want to take it into account in September when you do your third quarter projections, and by then we might have better guidance on how it's going to play out.
Speaker A: Okay, so that will be very interesting. Um, and Tom, you were also going to talk about the new Schmidt case. Um, uh, what does that mean for us?
Speaker C: Yeah, it's, um, Court of Appeals case that came out just a couple of weeks ago, and it really specifically gave guidance on how to look at taxes in support situations. Now, for purposes of doing calculations for support. And when we're looking at gross incomes for individuals, all the software, all of the schedules the experts prepare are always considering taxes. But there have been some cases where the courts, uh, either intentionally or unintentionally have not recognized the taxes, uh, associated income taxes associated with that income. Specifically on the Schmidt case. Now, it's a published case, but it's precedential. The court was looking at a person's income and dividing the gross income by 12, and then comparing that to the person's monthly budget and saying they don't need maintenance because the gross income divided by 12 matches the monthly budget. There was no recognition at all of the taxes associated with that. So the Court of Appeals remanded that for the court to fully address that. There also was some, um, discussion about health insurance and retirement contributions that are typical, um, deductions, uh, at the payroll level to be recognized as well. But it was really specific to the income tax equation.
Speaker A: Yeah. You know, and I think we just see this so much that, you know, it's normal that we take the taxes into consideration. Um, you know, taxes are going to happen. And so it was interesting that um, you know, the court clarified that. Yes, that is what, that what we've been doing it as a practical matter is what we need to do and what you guys have been, you know, largely coaching us through or helping us through, um, really is what needed to be done. Um, it's good to have clarity though.
Speaker B: It is.
Speaker A: So, um, is there anything else, um, going on in the uh, tax financial world? Anything that um, you're running into in cases as we kind of come out of this pandemic mode that we should talk about?
Speaker B: Well, we just happen to have a few topics. Um, one of the things that I've been seeing, uh, over the last 10 years or so. So I've been a CPA for just about 40 years. I've been doing family law for 22 of that. And over the last 10 years I have been seeing more and more people cheating on their taxes. And the cheating level of cheating has accelerated to an alarming amount. And it's really appalling to see. Um, I'm really hoping that the legislation that they have, ah, the federal legislation, compromise that uh, they're still bandying about will get passed because they're talking about increasing the funding for the IRS so that they can step up enforcement of this. So one thing I think people think that if a CPA did a tax return, that there's one sort of oversight as ah, part of that preparation process. And um, CPAs have clients sign a letter that says, client, you are in charge of this return. I'm going to take your information and put it in the appropriate place on the return. But it's your responsibility. So you can't pick up a tax return and assume that it's more correct because the CPA did it than someone did it on TurboTax. So I'm just kind of a heads up because it's been pretty amazing some of the things I've seen.
Speaker A: Yeah, I remember I went to trial once where my. It became apparent during trial that my client had uh, done some stuff with the taxes and that that didn't end up well. Um, you know, it was a credibility problem. And so I've been just really mindful of that. Um, you know, there's certain cases you just, you can't go to trial. And very often both sides are aware of what's going on.
Speaker B: So usually yes.
Speaker A: But, um, you know, when we talked about this in our prep meeting, I was thinking, I have some clients and businesses where you almost assume there's cheating. They're largely cash businesses, and they're not, I mean, small restaurant owner or different things, that there's a lot of cash running through. And you even get the other spouse saying, no, totally straight shooter. Everything is recorded, everything's accounted for. And it's kind of nice to see, but I know that's not the norm. And even there have been law firms that, um, took cash payments and they didn't find their way onto the books, so.
Speaker B: Well, I think Tom and I have probably both been in the position where it's known between the attorneys and the parties, and everybody knows that there's been some, um, misrepresentation of income. And we usually encourage people to settle because while we are pre colluded. So Tom and I, as, uh, consulting experts, cannot report these people to the taxing authorities, but the judge is supposed to. And so you kind of want to get those cases settled.
Speaker C: Strong encouragement for settlement all around.
Speaker A: Yes. And I have been, um, I have seen one of those. Well, I've seen where the judges file ethics complaint when I was on the ethics board, and I've also seen where the judge raised that question, um, uh, uh, pulled everyone into chambers and said, this needs to settle. So that was a huge signal. Um, any other little, uh, um, tips, tricks, things we should think about?
Speaker C: Something that, um, we've been seeing a bit more of is now that spousal maintenance and child support are, uh, all paid with after tax money. What we've done for the person who's receiving the support, we sometimes deviated from the calculated amount of child support and matched up the children expense amount with a specific child support payment. So let's say one parent has identified about $1,000 of kid expenses that they're responsible for when the children are with them. Um, that rather than calculating what the child support would be, you would actually deviate to have that specific amount being paid. The benefit for that is the remaining spousal maintenance really is then to cover that spouse's expenses. So when the children emancipate and that expense goes away and the child support goes away, there's more of a seamless continuity to the cash flow by matching the spousal maintenance with the actual spousal budget.
Speaker A: You know, and I will say I have seen that a couple times that we've done that. And it's, you know, the intent is to match things up to the family need and if, you know, parties agree, um, it tends to make a lot of sense. And I find, you know, I found where we in the past with the tax bill, nature of maintenance and you know, the rigidity of our, of how we deal with child support. We were kind of stuck doing something that the family thought they could have a better solution. And it seems that we're now creating better solutions, um, that are more match up with the need. Obviously it's just if there's agreement between the parties, but I've seen that a few times. It's kind of nice. Um, it's more practical I guess. Um, well, we're almost at the half hour mark so I really want to thank both of you for participating and helping explain some of these things and um, reassuring us and giving us some resources because uh, there's just been such a buzz, especially that child tax credit, about what it's going to look like. And I guess Karen, you've given us some places to go and look at and think about and it's not such a especially it's such a short lived thing apparently. It's kind of nice to see. But um, yeah, I want to thank both of you and hopefully we'll do it again sometime in the near future.
Speaker C: Thanks, Tom.
Speaker A: Hello and welcome to the Minnesota Family Law Podcast.
