Divorce Tax Tips

Don’t complete your final settlement until you understand the potential future tax consequences. Regardless of what your settlement agreement states, the IRS and California Franchise Tax Board regulations dictate what is taxable, what is deductible and how much tax you will have to pay. Here are some of the most common tax related issues that should be addressed: Should I file as Married Filing Jointly, Married Filing Separately, Single or Head of Household? If you are legally married on the last day of the year, you are eligible to file as Married Filing Jointly or married filing separate. In most cases, the combined tax is less if you file jointly. If you are no longer married as of the last day of the year, you have to file as Single, unless you qualify to file as “Head of Household.” You may qualify to file as Head of Household if you pay more than 50% of the cost to maintain a house for a “qualifying” person, such as a child or a parent. Am I eligible to claim an exemption for my child/children as dependents? The general rules require that your child must be under age 19 (or under age 24, if a full-time student), must have lived with you for more than half of the year and did not provide more than half of their own support. In the case of children of divorced or separated parents, there are special rules that allow either parent (not both) to claim a child as a dependent in any given year. Who is responsible for the tax liability related to a tax...

Common Financial Mistakes To Avoid Before, During and After Your Divorce-Part 3

The financial decisions you make during the settlement process will significantly affect your financial future. That’s why it’s crucial to understand and consider the potential long-term financial consequences of your decisions before you agree to a final settlement. In a previous blog I listed 8 common financial mistakes made during the divorce process – here are more: – Not considering potential long-term financial and income tax consequences: Ideally, you should focus on reaching a settlement that is consistent with your long-term financial needs and objectives. The terms of your settlement agreement will affect your financial well-being for the rest of your life. Divorce financial specialists are trained to look at potential alternative long-term financial outcomes. Even a qualified financial advisor can’t predict the future; however, based on our training and experience, we can help you identify those critical financial considerations that can help you reach the decisions that are most likely to be beneficial for you. – Not considering the potential “penalties” on retirement plan distributions. If you are taking a distribution from a 401(k), or other qualified plan, pursuit to a Qualified Domestic Relations Order (QDRO), take the cash distribution before rolling the balance into an IRA account. Once it goes into an IRA, you may be subject to a penalty for early withdrawal. Be sure to calculate the exact amount you need because you can only do this one time. – No plan for paying off joint credit cards and other debt. Not identifying all jointly held debt or agreeing to keep a card open and accessible to both of you could be a costly mistake. If...

Common Financial Mistakes To Avoid Before, During and After Your Divorce-Part 2

Part 2 – DURING: The financial decisions you make during the settlement process will significantly affect your financial future. That’s why it’s crucial to understand and consider the potential long-term financial consequences of your decisions before you agree to a final settlement. Here are common financial mistakes made during the divorce process: – Not preparing a complete and accurate accounting of income, expenses, assets and debts: Divorce financial specialists are trained to follow a comprehensive process in order to gather all of the necessary financial data needed to prepare meaningful reports and provide recommendations based on your specific needs and objectives. By considering all of the pertinent financial data during the early stages of the process, it is much more likely that your long-term financial needs will be met. – Not identifying separate and community property. California is a community property state so having a basic awareness of the community property rules will allow you to understand your financial rights and obligations. With the exception of inheritances and gift, everything acquired from the date of your marriage to the date of your separation is generally considered your community property. Any debts you incurred during the marriage are also typically considered community debts. If you owned separate property prior to marriage and kept that property “separate” from the community property, it will most likely remain separate. There are exceptions to these rules so it is in your best interests to seek legal and financial advice with regard to community and separate property before you agree to a final settlement. – Seeking financial and tax advice from professionals who are not...

Common Financial Mistakes To Avoid Before, During and After Your Divorce-Part 1

Part 1 – BEFORE: The ideal time to begin working on the financial issues related to your divorce is before the formal process begins. Deciding not to do anything or acting impulsively without knowing the potential long-term financial and tax consequences can be disastrous for your financial future. Here are common financial mistakes to avoid even before the divorce process begins: – Breach of fiduciary duty between husband and wife: The California Family Law code states that a husband and wife are subject to the general rules that govern fiduciary confidential relationships. “The relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take unfair advantage of the other.” This duty requires that each of you provide access, at all times, to all records kept. Both of you are also expected to provide each other with an accounting, and hold as trustee, any benefit or profit derived from any transaction which concerns the community property. The “penalty” for breaching this duty can be severe, including loss of your entire share of your community property interest. – Not identifying your goals, objectives and needs at the beginning of the process: Knowing what you want to achieve will help you to stay focused on what is important to you, and will keep you from being distracted by the emotional challenges inherent in the divorce process. Having a written plan can also help your attorney and other advisors understand how they can best meet your needs. – Not considering all of the divorce process options available to you: Going through a divorce can often...

5 Common Financial Mistakes To Avoid During Your Divorce

5 common financial mistakes to avoid during your divorce Making financial decisions before you have complete information. Divorce financial specialists are trained to follow a comprehensive process to gather all of the necessary financial data and then prepare meaningful reports and recommendations based on your specific needs and objectives. Taking financial and tax advice from friends and family: Having supportive family and friends to go to for during your divorce can be of great benefit to help you get through a difficult time, however, unless they are financial experts, don’t rely on their financial advice. Making financial decisions based on emotions: You will be faced with many difficult financial decisions during the divorce process. These decisions will affect your financial well-being for many years into the future. Decisions that are made without a well thought out approach typically lead to costly financial mistakes in the future. Don’t give in to the pressure to settle just for the sake of getting the process over with. Taking a narrow-minded position during the settlement process: There is no right or wrong solution. Ideally, you should focus on reaching a settlement that is focused on your long-term financial needs and objectives. You are more likely to reach a settlement that benefits you financially, in the long-term, if you approach the process with an open mind. Reaching a settlement agreement without understanding the potential long-term financial consequences. Divorce financial specialists are trained to look at potential alternative long-term financial outcomes. We can’t predict the future; however, based on our training and experience , a qualified financial advisor can help you identify the most crucial...

Key Elements Of The Collaborative Divorce Process

Collaborative Divorce is a non-adversarial approach. Both parties must agree to negotiate in good faith, and work together to reach a mutual agreement without going to court. The focus should be the well-being of both parties and their children. The key elements of the Collaborative Divorce Process are: • Reaching a settlement without going to court. • Open communication • Sharing of information with each other • Acknowledging each other’s needs. How does Collaborative Divorce differ from the more traditional adversarial approach? 1. Full disclosure – All information and financial data is revealed and shared with both parties. 2. Respect – Both parties strive to maintain a level of respect for the process, the professionals, and their respective spouse – even when they may disagree. 3. Protecting your children – Both parties agree that the needs of the children come first. 4. Sharing professionals – The “team” of professionals work with both parties to resolve their disputes without going to court. The team typically consists of a Collaborative lawyer for each party, one neutral financial professional, divorce coaches and a child specialist. 5. Focus on “win-win” solutions – All negotiations aim to help both parties reach fair decisions for themselves and their children. 6. Stay out of court – Collaborative Divorce is structured to assist a couple so that they can work “cooperatively”, maintain control of the process and make their own decisions. I’ve served as the neutral financial specialist on many Collaborative Divorce cases over the past 9 years and have seen how both parties’ have benefitted. With the right team of professionals in place and both parties...