When Divorce Gets Sticky

Let's face it – divorce is not fun. Almost no one considers this process to be enjoyable, or sets out to go through a long and contentious divorce proceeding just for kicks.

However, some divorces can be a lot worse than others. There are some pretty common factors that make some divorces relatively easy, and others into long, protracted nightmares. The details matter! When assets can be entangled, and families reconfigured, without a lot of contestation and acrimony, everyone’s better off – but that’s easier said than done.

An orderly process is worth a lot in divorce proceedings. Any seasoned divorce attorney knows this, and so do many people who have been through these proceedings as clients. It’s incumbent on the divorce attorney to help clients to understand both their rights and their obligations under the law, to promote a smoother, less unpleasant process.

We know that divorce proceedings tend to involve high emotions on one or both sides. Custody battles are not infrequent, and the splitting of assets can be pretty complicated and involve quite a bit of feeling. Couples who have done nearly everything together have to get used to the idea of doing things apart. That’s a tall order for most couples, and on top of that, there’s the law; good legal counsel is based on helping to navigate that other layer of legal complexities that apply.

Financial Resources

At Financially Independent Transitions, we take care to maintain a consultative approach with our clients to help them navigate these often tricky financial processes. With CDFA (Certified Divorce Financial Analyst) designation & Enrolled Agent designation, we have the acumen to represent our clients before the IRS, but we also have the philosophy of being by your side as divorce proceedings play out. It's critical to remember that although some aspects of divorce happenings take place in a court, others take place outside of that legal context and the two tend to affect each other to a great extent.

We offer resources like weekly dispatches on our website, and other informative guides, so that our clients can, in a sense, “self serve” a bit in discovering how to work through divorce. We're always on call, but we also seek out good supplementary resources for our clients that can help people to manage conflict in a healthier way, understand their assets better, and generally fare better in divorce proceedings. Get excellent, qualified tax & financial counsel from Financially Independent Transitions in a dedicated, caring environment.

Four Mistakes That Could Cost You Thousands of Dollars in Your Divorce...And How to Avoid Them

We see a lot of divorce decrees in our office. When I say a lot, I mean, a lot. Invariably, we see a lot of financial mistakes in those decrees too.  While every state is different, federal law reigns supreme. If this is your first tax season post-divorce, or if you are in the middle of your divorce proceedings, paying attention to these four most common mistakes will pay huge dividends later on.

Don’t forget IRS form 8332

IRS form 8332 (release/revocation of the release of claim to exemption for child by custodial parent) is a crucial form if you have dependent children eligible for child tax credits. If the non-custodial parent is going to claim the above-mentioned tax credits, the custodial parent, pursuant to your decree, must sign and release IRS form 8332 to the non-custodial parent.  The non-custodial parent retains this form as proof they can claim the tax credits. For most couples, this form is signed every year. You can find it here: https://www.irs.gov/pub/irs-pdf/f8332.pdf

Don’t forget the Other Dependent Credit

The Tax Cuts & Jobs Act, which started in late 2017, but mainly applicable in 2018, has substantially changed the tax landscape. This is particularly true for divorcees and soon-to-be divorcees. Because of the broad changes to the tax code, many divorce decrees are incongruity to these new laws. The Other Dependent Credit is a $500 non-refundable tax credit for dependents older than 17 that do not qualify for the child tax credit. Generally, we see two situations:

1. Divorce decrees enforced prior to the law change generally do not address the Other Dependent Credit. Sometimes the language in the decree is written too specific to accommodate the old laws and states that the exchange of tax credits end when the youngest child turns 17. If this is your situation, you and your former spouse will need to either work together or modify your decree in accordance with the new laws.

2. Too many attorneys do not understand or are unaware of the new tax law. We are still seeing new decrees where the language does not jive with the new tax laws.  Having a federally licensed Enrolled Agent or CDFA® on your divorce team, or as a financial neutral, can help you avoid these mistakes.

Don’t Forget Who Get’s to Claim the Child & Dependent Care Credit

If you are a working professional & have young children, it’s quite possible those children are in some form of daycare. As you may know, daycare can be extremely expensive! The IRS provides a tax credit where you can get 20% to 35% of up to $3,000 of child care & similar costs for a child under 13, an incapacitated spouse or parent, or another dependent so that you can work (and up to $6,000 for two or more dependents).

What happens in a divorce when both parents are sharing this cost? Can both parents claim this credit? Can it be rotated every other year?

The IRS is very specific that a qualifying person may only be claimed on one tax return. If a dependent is claimed on more than one tax return (for example, a child is claimed by both divorced parents) the IRS will apply a set of tiebreaker rules to see who gets to claim the dependent.

Alimony: Is it taxable?

Pursuant to the Tax Cuts & Jobs Act of 2017, alimony is no longer considered taxable income for any decree signed in force after midnight, December 31, 2018. If your divorce was finalized prior to this date, then you are subjected to the old laws & will continue to report alimony as usual.

But what happens if you are under temporary orders, receiving payments but in a lengthy divorce proceeding that hasn’t finished but started prior to the cut-off date mentioned above? What happens if you or your former spouse takes you back to court with the intent to modify your alimony payments?

The answer here is not so clear cut.  To help in these more complex situations, the IRS clarified the definition of a divorce instrument to include:

• A decree of divorce or separate maintenance or a written instrument incident to such a decree.

• A written separation agreement.

• A decree (not described in clause (i)) requiring a spouse to make payments for the support or maintenance of the other spouse.

Additionally, if you read the actual bill, there is a section that clarifies how divorcing couples can deal with these situations:

“any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.” Source https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

From a tax perspective, as we read the bill, we interpret this to mean that should a final decree signed prior to the law change be modified after December 31, 2018, the parties can choose whether or not be subjected to the old law or the new law. What’s the bottom line? Consult your attorney & a tax advisor if you’re in this situation.

4 of the Biggest Divorce Questions

As a professional and established firm helping with divorce scenarios, at Financially Independent Transitions, we hear a lot of the same questions from clients. Here are some of the top questions that those who are going through a divorce need to have answered:

Who Gets What?

This question is laughably simple, in some ways, and really has to be answered in a more complex way, after doing some research on the individual case.

Of course, that question is at the top of the list for many of these parties to a divorce who are wondering what the asset split is. You hear a lot about dividing everything half-and-half, but it's really a lot more complex than that. It depends on a variety of factors, including the context of the family life that existed prior to the divorce. We help our clients to navigate all of that complexity to figure out what the final result is going to look like.

Which of My Assets Are Shielded From Loss?

Different states have different rules on the splitting up of personal assets in the divorce. For example, what about inheritance money or other windfalls?

Again, it's best to approach these questions on a case-by-case basis. We’ll work with clients to come up with a game plan and explain why some assets may be treated differently than others.

What About the Value of My Work?

One issue that comes up a lot in modern divorces is the work history of the two parties involved.

So often in today's society, one of the partners will give up specific career goals in order to raise children. Ideally, and in many cases, the parents collaborate on raising the children, but ultimately, one often provides more of this service than the other, and it can have an impact on that person’s career and work life.

As a society, we've moved a certain way toward valuing the work in the family home, but there are still a lot of issues with how this is done – which lead to those common client questions. We often help our clients to understand this process better.

I Paid (x) Bill: Now What?

Often we hear from a spouse who has made the majority of the mortgage payments on a home or other jointly owned property. We hear from spouses who have paid the lion's share of the utility bills, or property taxes or other costs. They have certain expectations, then, when it comes to dividing up the assets.

This is another common question that takes some particular thought to address. It’s not always cut and dried – in fact, in most cases, it’s not!

Have questions? Contact us and ask about what you can expect in a divorce.

Important Financial Steps to Take Before Filing for Divorce

It’s estimated that approximately 50 percent of all marriages will end in a divorce. This means that if you are married, there’s a 50/50 chance you will be filing for a divorce eventually.

When you make the decision to file for a divorce, you may not be thinking about your finances right away. After all, the psychological burden of your marriage coming to an end can be something that is all-consuming, which makes it difficult to think about anything else.

Also, the costs that are associated with divorce, such as legal fees and selling a home, can be complex and stressful. However, before filing for divorce, it’s a good idea to make specific financial decisions, which can help ensure you emerge from this difficult process on solid, financial footing.

Before you file the paperwork for a divorce, make sure to make the following financial moves.

Take Inventory of Your Financial Situation

A crucial thing that you can do if you are thinking about filing a divorce is to take a long hard look at your financial situation. This includes factors such s your salary, loans that are in your name, how much you have in your bank account, insurance policies, retirement accounts, credit card balances, and more.

You need to take time to account for all of your current assets and liabilities. Knowing what you owe and what you own can be invaluable when going through a divorce. It’s also important to get all this pertinent financial information organized. That’s especially the case because you will eventually have to sign a financial disclosure statement.

Check Your Credit Score and Your Credit Reports

You need to know your credit score and your credit reports before you file for divorce. Take some time to look at your overall credit history and figure out what your score means. This is extremely important if you have left handling the financials to your spouse.

If your spouse has been the one to take out loans and get credit cards, you may have a low credit score and not even realize it. As a result, it you attempt to purchase a vehicle after you get a divorce, you may not be approved, simply because your credit history is non-existent.

Look into Your Spouse’s Finances

In many marriages, there will typically be one spouse that handles most of the financial issues. If you don’t understand your financial situation, it can put you at a disadvantage during the actual divorce proceedings. Now is the time to learn about your spouse’s situation, before you move forward with this process.

In most cases, if you are planning to file for divorce, the best thing you can do is to work with a team of professionals who will keep your best interests top of mind. Usually this includes an expert on divorce finances and a divorce attorney. By getting your finances straight now, you can avoid problems as the divorce moves forward.

Getting Divorced? Don't make these tax-mistakes.

Paying attention to your taxes while getting divorced can be a lot like walking a tightrope! It’s really easy to lose your balance. Having a safety net of professionals in addition to your attorney can prevent you from making fatal financial mistakes.

We see a lot of financials, stipulations & divorce decrees in our office. Most are well-drafted and cover all the bases. Every once in a while, we will have a tax or divorce client come in with a settlement agreement which created negative and unforeseen consequences.  As all assets are not created equally, it's important to watch out for these and other issues before signing your decree.

• IRS code 1041 allows for a non-taxable transfer of assets between spouses during a divorce. Sometimes our client’s assets include things like business interest, real estate or other assets that are titled and owned by another legal entity. While 1041 rules protect individuals, the case is not always the same for entities. Paying attention to titles & ownership will prevent unforeseen tax issues for you.

• Employer sponsored retirement accounts such as 401k, 403b & 457 plans are split via a Qualified Domestic Relations Order, or QDRO. The IRS allows for penalty-free distributions from these plans for the non-employee spouse, which is referred to as the alternate-payee.  It’s important to remember that while these distributions are not penalized, they are still considered taxable income. Additionally, the 10% penalty waiver does not apply to IRA accounts.  Once those assets are transferred to the IRA in the new owner’s name, they are still subject to the normal distribution rules.

• In high net worth cases it’s common for us to see capital loss carry-forwards from either stock or real estate.  Capital losses occur when stock is sold, with a maximum loss of $3,000 per year. Any remaining amount is carried forward to the next tax year.  Additionally, net operating losses (NOLS) from business or investment real estate follow somewhat similar but complex rules. NOLs can be carried back up to 2 years and carried forward indefinitely. For non-professional rental real estate, the losses start to phase out after $100k income and are capped at $150k. Anything partially or completely phased out carries forward. The IRS does not allow for a split or transfer of capital losses from one taxpayer to another. What this means is that the valuation and taxation of the asset could be overlooked. Therefore, attention to the ownership & title of the asset as mentioned above is extremely important.

• Pay attention to your filing status, especially if your divorce is finalized late in the tax year. If you are the breadwinner and paying child support, more than likely your filing status will change from Married filing joint (MFJ) to Single. If this is the case, you must consider changing your tax withholding as you’ll be in for a nasty surprise come tax season.

• Creative divorce settlements can help you maximize your income. As of midnight December 31, 2018, spousal support payments are no longer considered taxable income for any new divorce decrees. Any decrees signed prior to this date, including modifications, are grandfathered into the new tax law. Recently we had a client who’s soon-to-be-ex wanted to stay in the marital home.  After consulting with us & his attorney our client agreed to a settlement where part of his spousal support was represented through the mortgage payments. Why was this important? Since he is still able to itemize, the mortgage payments and property taxes are still deductible on his schedule A. Had he just paid the support directly to her, he would have lost this favorable tax break.

 As a Certified Divorce Financial Analyst, CDFA®, and Enrolled Agent, EA, I have a unique skill set that could mean a more equitable and financially independent transition for your divorce. You can contact us at info@fitdivorce.com.

What is Divorce Financial Mediation?

Like other mediations, a financial mediator services as a neutral facilitator rather than as an advocate & advisor representing one party in the divorce. The facilitator provides a structured process to guide the clients toward mutually agreeable decisions.

Participating in mediation for financial matters in divorce can be a constructive, non-contentious means of coming to agreement on financial issues in your divorce process.

Alternative dispute resolution methods such as mediation are more likely to result workable decisions that are more likely to be kept and more likely to support a doable relationship going forward.

 A financial mediator brings financial knowledge, insight, and understanding to the table to guide clients through current challenges and helps to foresee potential issues in the future.

 A Certified Divorce Financial Analyst brings specialized knowledge to works with clients. Services include:

• Characterizing and evaluating assets

• Developing budgets and projections to address financial needs post-divorce

• Looking at long term implications of settlement decisions

• Determining after-tax values & basis of property

Financial mediation begins with a discussion to identify needs, wants, wishes and concerns as they relate to:

• The mediation process

• The children

• Property

• Taxes

• Anything else that applies

From this point the clients and mediator identify the items requiring decisions and decide on actions to move forward.  The decision oriented discussions that follow focus on information from the identified interests and agreed upon information to identify possible options and solutions.

Typical challenges that may be addressed in financial mediation

• What to do with the house

• Support needs analysis

• Dividing children’s expenses including college

• Dividing assets across asset classes including

  • Retirement funds

  • Cash and Investment assets

  • Real Estate

  •  Highly Appreciated property