401(k) retirement plans are commonly divided in divorces by way of a Qualified Domestic Relations Order which prevents the transfer of the funds from the plan participants account to the other spouse from being a taxable event such as it would be if they simply withdrew money from the account. If you participate in a 401(k) plan then you are probably well aware that withdrawing money before you reach retirement age subjects you to a 10% penalty on the amount of money you withdrew and you have to pay income tax on the withdrawal.

For many divorce cases, however, the use of the 401(k) funds is a necessity for one or both of the parties. Recognizing the reality that people needed access to their accumulated retirement funds for legitimate and immediate financial purposes, the IRS created a mechanism for being able to utilize your 401(k) funds without having to pay the taxes or penalty on the withdrawals. A “hardship distribution” is defined by the IRS under Reg. § 1.401(k)-1(d)(3)(i) as an immediate and heavy financial need by the employee or the employee’s spouse or dependent with the withdrawal being a sufficient amount to satisfy the need.

The need to take a “hardship distribution” is not uncommon for many people involved in a divorce. Divorces can cause financial damage to both parties, but particularly the “dependent spouse” who may not have the cash flow or immediate resources to address an urgent financial need. It can also be a tool for the “independent spouse” who transferred a significant portion of their wealth to the other spouse. The award of 401(k) assets (if in the form of an IRA, the analysis changes somewhat) may be the financial resource they need to stabilize and rebuild their financial health. While any financial advisor would advise against using tax deferred money if it all possible, circumstances dictate otherwise at times and knowing this option exists may be helpful.


Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter @AaronWeemsAtty.

Last May, Susan Foreman Jordan in our Pittsburgh office issued a very informative alert on the impact of the United States Supreme Court’s decision in United States v. Windsor on the IRS and Department of Labor recognition of same-sex marriages.

Susan identifies and explains how the IRS and Department of Labor clarified, so as to avoid any ambiguity, that if the same-sex marriage was legally entered into, then they would consider it a valid marriage even if the parties were domiciled in a jurisdiction which does not recognize same-sex marriage.

More technically, the IRS issued a Notice (Notice 2014-19) confirming that for qualified retirement plans and other employee benefit programs must recognize same-sex marriages as of June 26, 2013 when the Windsor decision was made, but that they do not have to extend retroactive recognition to that marriage. Susan expands upon that point and amending plan language to confirm to the Windsor decision.

Susan’s alert is really aimed at plan sponsors and what they can do to confirm with the law. It is also informative to plan participants to understand how the Windsor decision has affected their retirement plan.


Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter @AaronWeemsAtty.


As the nation emerges from the fog of tax season, many people who paid little attention to their taxes for the previous eleven months just received a crash course in tax planning, either on their own or with their tax professional. If they have a 401(k), they dealt with their retirement account in some way, either by having to pay tax on a distribution or looking at what they were able to contribute over the year; perhaps they were making one last payment before the tax filing deadline.

For many people, however, having a 401(k) plan begins and ends with a few simple actions: sign up for a plan through your job; contribute a pre-tax amount from each paycheck, and; never deal with it until you retire.

Such a simplified approach is a great way to ensure consistent savings and a retirement nest egg. It is not, however, the end of the equation. Recently, Paul T. Murray, president of PTM Wealth Management, wrote a blog entry on five techniques for avoiding the 10% tax penalty for an early withdrawal from a 401(k). This is great information because it sheds light on a practical issue many people going through a divorce or separation face: having to use the only accessible financial account available to them – the 401(k) – before they reach the mandatory distribution age.

Paul highlights five areas where people can avoid paying the 10% tax penalty on an early withdrawal. Not surprisingly, they are complicated and require significant planning to successfully utilize. The most intriguing, in my opinion, is the one-time withdrawal from a rollover of 401(k) funds. Many times a dependent spouse either had no retirement account or a lightly funded account. When the time comes for them to receive a substantial rollover from their spouse’s 401(k) to their IRA, the IRS provides for a one-time withdrawal in any amount. This could be a major tool for a spouse who is in a case with little cash in the marital estate and has the immediate need for cash. It might be the cash infusion they need to pay off a debt or cover their expenses as they transition into their new phase of life.

Four other techniques are highlighted and the blog entry is worth reading. The tax code is complicated, but if you know where to look it can also provide for some creative solutions to financial and tax problems.


Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a resident of Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter @AaronWeemsAtty

I am sorry I doubted you, Alan Thicke
(Image: www.aaahighroads.com)
I am sorry I doubted you, Alan Thicke

Like many people, I have a healthy skepticism for infomercials or to-good-to-be-true schemes, so when I kept hearing Alan Thicke – famous for the 1980’s show “Growing Pains,” marrying a Miss World, and the real life dad to pop star Robin Thicke – pitch a tax forgiveness program, I dismissed it. I assumed it was probably another borderline-legal payday loan scheme, reverse mortgage concoction, or debt forgiveness system which prey on fiscally at-risk and naive.

The pitch was about a “Fresh Start Program” offered by the IRS which, it turns out, is a real thing. The basic tenants of the program are to allow for taxpayers to satisfy their back taxes and avoid tax liens on their property. There are three main elements to the program: first, the IRS will, in many cases, hold off on filing a Notice of Federal Tax Lien on amounts up to $10,000.00 which means a delay in the IRS attempts at collection. Secondly, the taxpayer can have up to 72 months of installment payments to pay back taxes up to $50,000.00. Longer installments or back taxes greater than $50,000.00 require some additional disclosures and scrutiny by the IRS. Finally, the program allows for the taxpayer to enter into an Offer in Compromise to pay-off back taxes for less than the amount they owe. That determination is made by the IRS if the Offer in Compromise is a better or more secure outcome for the IRS than other options.

Mr. Thicke is in the celebrity pitchman for a tax preparation company which specializes in the Fresh Start Program, but what he says about it has merit. For individuals who have gone through a lengthy and difficult divorce, they may have tax liabilities which arose before they had the financial resources to properly address them.  The IRS Fresh Start Program may be a viable option to offer some relief and stability to such individuals before they incur the adverse credit event of a Notice of Federal Tax Lien or collection attempts by the IRS. It is certainly worth exploring with your attorney and tax professional.


On September 12th, the Pennsylvania Commonwealth Court issued a ruling which barred the Montgomery County Orphan’s Court Clerk, D. Bruce Hanes, from issuing any more same-sex marriage licenses.  As an example of the near constant local and national machinations of the same-sex marriage and the aftermath of the Supreme Court’s Windsor decision, a few days after the Commonwealth entered the injunction, the IRS issued a statement that legally married same-sex couples may use the “married” federal tax filing status.  The IRS will look to the validity of the marriage based on where the marriage took place, rather than the current residence of the couple.  In other words, if the couple were legally married in a state, they will be allowed to file as a married couple even if they live in a state like Pennsylvania which does not recognize that marriage.

It is a telling statement by Treasury Secretary Jacob J. Lew that “[same-sex] couples…can move freely throughout the country knowing that their federal filing status will not change.”  This is essentially applying the IRS’s applying full faith and credit to same-sex marriage.

Income taxes are only a sliver of the overall picture of how Windsor has impacted the federal government. Worth noting is that in a state like Pennsylvania, same-sex couples will have to file under a different designation for their state return. This will likely require the filing of “dummy” Federal returns which can be attached to the State filing, but that are not filed with the IRS. Taxes are already complicated and it is imperative that same-sex couples in Pennsylvania consult with an accountant if they plan to file Federal taxes as a married couple.

Tax issues are an important component of equitable distribution cases and the Pennsylvania support code specifically allows the Court to allocate child tax exemptions between parties. Matt Levitsky, a tax and estate attorney in our Blue Bell, Pennsylvania office, recently took the time to elaborate on the issue of child tax exemption and the dispute that can arise as to which parent may claim the child/ren. 

Matt and some of his colleagues in the tax and estate practice group will be launching a tax blog soon which will be a great source of information on current personal and corporate tax issues. Check back soon with Fox Rothschild’s roster of blogs for the launch of the tax blog or take some time to explore other areas of interest.


Matt Levitsky:



Who Gets To Claim a Child as a Dependent if There is 50/50 Custody?



With the battle over assets being the primary one in a divorce, tax issues may often be overlooked which can have an definite economic impact on a client. One such tax issue is the benefit of who gets to claim children as dependents. In 2012, a taxpayer may receive a $3,800 federal income tax exemption for each child that he or she can claim as a dependent. If a child is young at the time of divorce, this has a substantial economic benefit.


A child can be a dependent of a taxpayer only if he or she is a “qualifying child” of the taxpayer (the child can also be a “qualifying relative”, but this is beyond the scope of this blog entry). In order for a child to be a qualifying child of a taxpayer, four (4) requirements must be met. First, the child must be (i) a child of the taxpayer or a descendant of such child, (ii) a brother, sister, stepbrother, or stepsister of the taxpayer, or (iii) a descendant of any such relative. Second, the child must have the same “principal place of abode” as the taxpayer for more than one-half (1/2) of the taxable year. Third, the child must be under the age of nineteen (19), a student under the age of twenty-four (24), or permanent or totally disabled at some time during the taxable year. Finally, the child cannot provide more than one-half (1/2) of the child’s own support during the taxable year.


Generally, under § 152(e) of the Internal Revenue Code (the “Code”), a child is a dependent of the custodial parent unless a divorce decree or written separation agreement between the parents entitles the noncustodial parent to the dependency exemption. But what if the parents share custody 50/50 and the divorce decree or separation agreement hasn’t been entered into or does not address the issue?


If both parents can claim the qualifying child under the four step test above, you must look at the tie-breaker rule of § 152(c)(4)(B) of the Code. Under the tie-breaker rule, the parent with whom the child resided with for the longest period of time during the taxable year can claim the child as a dependent. But what if the child resides with both parents for same amount of time during the taxable year? In this case, there is a second tie-breaker rule. The child is treated as a dependent of the parent with the highest adjusted gross income (“AGI”).


At first thought, determining the parent with the higher AGI seems fairly clear cut. However, what if one of the parents is employed while the other is a stay at home parent because his or her new spouse works. Do we include the new spouse’s income in the AGI determination? Surprisingly, this issue is not addressed in the Code nor the Treasury Regulations. 


Section 152(d) of the Code concerns claiming “qualifying relatives” as dependents. In clarifying a similar one-half (1/2) support requirement to the four (4) part test above, § 152(d)(5)(B) clearly states that “in the case of remarriage of a parent, support of a child received from the parent’s spouse shall be treated as received from the parent.” Clearly in this context, Congress considered the effect of remarriage. Therefore, one could argue that if Congress wanted a new spouse’s income to be included in the AGI computation, then it would have so provided. On the other side, one could argue that the new spouse’s income should be included in AGI because a stay at home parent should not be penalized because he or she is staying at home and allowing his or her spouse to go out and earn an income.


We recently discussed this AGI issue informally with the IRS. The Service told us that the consensus among those who deal with § 152(e) is that the income of the new spouse is not included in the AGI tie-breaking test. This issue is actually one that the IRS intends to address this year, as indicated in Item 22 under General Tax Issues in its 2011-2012 Guidance Plan ( http://www.irs.gov/pub/irs-utl/2011-2012_pgp_3rd_update.pdf. ).


If you have any questions on any of the issues discussed above, please feel free to contact us.


The allocation of child tax dependency exemptions is a topic of discussion among our clients on a frequent basis. While the guidelines issued by the I.R.S. dictate who is eligible to claim the children, in Pennsylvania the issue may be raised in the context of child support under Pennsylvania Rule of Civil Procedure 1910.16-2(f). The stated purpose of this rule is to "maximize the total income available to the parties and children" and, therefore, the Court has the authority to award the exemption to either party and, when awarding it to the non-custodial parent (i.e. the party who may not be eligible to claim the exemption under the I.R.S. guidelines), order the custodial party to execute the I.R.S. waiver allowing the other parent to claim the exemption.

Leslie Spoltore, a partner in our Wilmington, Delaware office, recently wrote about a Delaware Family Court case which deals with the allocation of the exemption and articulates a much more specific set of criteria for deciding which party should be awarded the exemptions. It is a worthwhile read and gives some insight into a different way to deal with this issue in a family law case.




As the national divorce rate for new marriages hovers around 50%, couples living together before marriage or in lieu of marriage is an increasingly routine arrangement. Media coverage has played a part by confirming what many people knew anecdotally: that people are choosing to live together as a committed couple without ever getting married.

What is also increasing in frequency and necessity is for cohabitating couples to be proactive in laying the legal groundwork for how they plan to live together, acquire or pay for assets, and how they should disentangle themselves from such arrangements in the event that they break-up. It can be a difficult conversation to have – no less difficult than one party asking the other for a pre-nuptial agreement – and the introduction of real world considerations may burst the romantic bubble for some, but the risks are real and people’s lives change – the boyfriend with a steady paycheck  has gone back to school and is unable to pay half the mortgage; your girlfriend can not afford her to contribute to household expenses when she loses her job; you have a child together.


The ease of cohabitation without the apparent messiness or seemingly permanence of marriage can actually create a larger quagmire of difficulty if the relationship ends. If you are considering cohabitating with your partner, there are a few things worth considering:



Continue Reading Cohabitation and Unmarried Couples – Practical Tips (Part 1/2)

Not surprisingly, the two year rule has been coming under fire in Congress with the introduction of legislation by presidential candidate and Minnesota Representative Michele Bachmann, as well as a demand by Senate Finance Committee Chairman Max Baucus that the IRS review the two year deadline.

With respect to divorce, particularly in Pennsylvania where two years of separation is not an uncommon occurrence, people could easily sign a joint tax return as a routine action, without taking the time to carefully review the contents of the filing. Factor in abuse, fear, and intimidation and it is not a surprise that truly "innocent spouses" are being denied the right to raise that defense due to the two year limitation.

For most families, filing joint taxes is a routine affair – seldom is the time when filing under a different designation other than "married filing jointly" place a family in the most advantageous tax position. For couples who are separated, continuing to file jointly may continue to make the most sense.

There are times, however, when one spouse has no knowledge of the family’s financial affairs. If the situation warrants it, that spouse could claim relief from the IRS under the "innocent spouse" rule. This rule is designed to protect taxpayers who should not be responsible for the tax liability incurred by the culpable spouse, even in situation where a joint return was signed by the "innocent spouse."

A recent article, however, highlighted how the IRS has persistently struck down appeals by "innocent spouses" due to their failure to seek relief within two years of their receipt of an IRS tax collection notice. What makes these decisions particularly difficult to accept is that they are being made against battered spouses or other parties who were not in a position to know about the tax liability due to abuse or estrangement from the other spouse.  Consequently, they often do not even know there is a problem before the two year limit lapses.