Apr 09

Health Insurance Issues Post Divorce

By Chris Chen CFP | Divorce Planning

Health Insurance Issues Post Divorce

With children and income issues on top of the list of critical concerns, health insurance is often overlooked by divorcing individuals, their divorce mediators and divorce lawyers . Everyone agrees that health insurance is important, but expects or hopes that a solution will find itself.
In the case when one of the divorcing parties has employer provided health insurance, it is assumed that this will continue for the divorcing spouse, as mandated by Massachusetts law. In addition,, people usually don’t think of the tax consequences of continuing employer based health insurance for a divorcing spouse . That is because employer based health insurance is considered a non-taxable fringe benefit for the employee and his or her family under IRS rules. Yet that does not necessarily imply a tax free benefit for an ex-spouse.

Health Insurance, Divorce and the IRS

Under IRS rules, a benefit provided by an employer to the former spouse of an employee, is a taxable benefit to the employee. Hence the employee must pay federal income tax on his ex-spouse’s health insurance. In turn that imputed income could be deducted as alimony by the taxed employee. That would create additional taxable income for the ex-spouse.

Under IRS rules, a benefit provided by an employer to the former spouse of an employee, is a taxable benefit to the employee

To make matters worse, employers are just waking up to the issue. Starting in 2013, employers have started to apportion the value of fringe benefits on employees’ W2 forms. This will greatly facilitate including an ex-spouse’s share of health care insurance on the employee’s W2 form in January 2014, and, thus increase the employee’s taxable income.  In turn, should the employee deduct the insurance as alimony, the ex-spouse must add the amount to his or her own taxable income, or face the consequences of under-reporting income.

Dealing with Health Insurance in a Divorce

In a divorce negotiation where the amount of alimony and the sharing of tax benefits are vigorously negotiated between the parties, to add health insurance choices and their consequences to the menu may not be welcome. It would be hardly better, for the parties find out the consequences after the fact.
As financial planners with a divorce specialty, we recommend that the ex-spouse should get his or her own insurance as soon as possible. That is not always feasible in the short run. As an alternative, we recommend to choose the best option available with all eyes open to the consequences.
If you would like to learn more, ask for the white paper that I co-authored with Justin Kelsey, Esq., or call one of the authors for a consultation.

Apr 09

In a Divorce, can we share a Certified Divorce Financial Analyst™?

By Chris Chen CFP | Divorce Planning

In a Divorce, can we share a Certified Divorce Financial Analyst™?

Sometimes we get asked by clients who are working through a divorce whether it is OK to share financial analysts with their spouse. In some cases it works.

For instance in a Collaborative divorce, the financial planner often works neutrally for both parties, while the spouses are represented separately by lawyers . In mediation cases, we have worked for both parties as well. In either the collaborative or mediation methods, the parties often aim to shape their divorce agreements in good faith as it best suits them. They will try to reach an agreement that is “fair and equitable” without the court making decisions for them. In those cases, it may make sense to share a financial planner. Indeed, it may even facilitate and speed up the process.

In the more common adversarial process (each party talks through their own lawyer), people ask us also whether they can share financial specialists.

We do not recommend it. We do not do it. We believe it is important in a divorce to get competent financial advice  in addition to competent legal advice, however we could not provide that should our loyalties be split.  In that case the answer is no.

Apr 04

I Just Made the Last College Tuition Payment! Yea!

By Diane Pappas | Financial Planning

How To Pay for College - Real-Life Edition

Anyone who pays for college tuition can understand the joy and need for celebration when you finally make that last tuition payment.  It means two wonderful things – (1) your child is graduating from college next month and (hopefully) moving out into the real world and (2) you now have more available money with which to spend somewhere else – unless of course, child #2 is bringing up the rear.

Regardless, paying for a child’s college education is a big accomplishment and making that last payment is a milestone worth celebrating.  But if you still have a child in college and more on the way, the thought of celebrating doesn’t even cross your mind.  With college tuition payments resembling monthly mortgage payments these days, the real question becomes, how are you going to afford it?

There is plenty of information on the internet addressing this very question, but we wondered, how many of them are written by people who have actually gone through the process?  In this series, ‘How to Pay for College – Real Life Edition’, we will share some of the things that have been done in real life, that have helped made paying for college a little more affordable and easier on the pocketbook.

 

Tip # 1 – Use a Monthly Payment Plan or MPP

If your child is currently in high school, there are obviously more important things you should be doing right now than worrying about an MPP, but at least you will now be informed.  Looking back over the last four years, the MPP stands out as the one thing that made my life a lot easier.

Typically, you are sent a bill for the fall semester in the beginning of August and asked to pay an outrageously large sum of money within 30 days.  Gulp.  However, if you have already arranged a 10 or 12 month MPP or Monthly Payment Plan, then you don’t need to ‘gulp’ as deeply as someone who did not.

Most colleges and universities participate in this type of program and will designate an outside company as the administrator of their MPP.  It is essentially an extension of credit by the school to the tuition payer, typically with no interest charges and only a small annual fee of around $65.  To me, it’s a no brainer.  You can even have the monthly payments automatically withdrawn from your checking or savings account.

An MPP accomplishes two things.  First, this once, ambiguous and unknown amount is now a fixed expense, and second, spreading that payment out over 10 or 12 months helps in budgeting your money. You no longer need to fear that looming tuition bill in August and January, because, even though the amount hasn’t changed, paying for it (even if just psychologically) has become easier.

Be sure to inquire with the Financial Aid or Admissions Office to see if they offer an MPP.  In order to use the 12-month payment plan, the first payment is typically due in April for enrollment in the fall semester.  You may have to play catch-up freshman year, but by sophomore year, you will be a pro!

 

I’m amazed at how quickly the last four years have flown by.  One minute you’re packing your kid up and sending them off to live in small cinderblock room with a complete stranger and the next minute, they are graduating with a whole new set of lifelong best friends and an educational experience that will get them started on the path towards a fulfilling life.

Don’t let the stress of paying for college over shadow the wonderful opportunity you are providing your children.  With the proper planning and a realistic approach as to what your family can afford, paying for college does not have to be such a scary thing.

 

Be sure to check back here for the next ‘How to Pay for College – Real life Edition’.

 

 

 

 

 

 

 

 

 

 

 

Apr 02

Tax Season Dilemna: Invest Money in a Traditional IRA or a Roth IRA?

By Chris Chen CFP | Financial Planning , Retirement Planning

Invest in a Roth IRA or a Traditional IRA?

This being tax season, you may want to know, should you put your money in a (traditional) IRA or a Roth IRA?

In a traditional IRA, your contribution will be deductible from your taxable income, and will grow tax-deferred .  Income taxes will be paid when you take distributions at retirement.  The immediate benefit is that a contribution will help you reduce your taxable income, and, therefore, your taxes.  (For the 2012 tax year, you have until April 15 to make that contribution.)

For a Roth IRA, your contribution is not tax deductible .  However, it will grow tax free, and distributions in retirement will not be taxable.  Hence, your retirement income from the Roth would be tax-free.

The traditional IRA helps you save on taxes now , and the Roth IRA helps you save on taxes later .  What then should you do: save on taxes now or save on taxes later?

The answer is entirely about what you expect your taxes to be when you retire.  If you expect your tax rate to be lower in retirement than today, you may want to consider a regular IRA.  That is because, you will be saving a relatively large amount in taxes today, and paying at a relatively low rate in retirement.

On the other hand, should you expect your tax rate to be higher in retirement than today, you may want to consider a Roth.  That is because you would be paying at a low tax rate today, and saving even more taxes later on.

So, you might ask, how can you figure out what your tax rate will be in retirement?  That is a different question altogether!

Mar 25

Time for Some Spring Financial Cleaning – Getting Rid of Financial Clutter

By Diane Pappas | Financial Planning

Time for Some Spring Financial Cleaning - Getting Rid of Financial Clutter

If you are like most people this time of year, you are probably searching through piles of papers, documents and receipts trying to find the right ones to give to your accountant.  So much financial clutter.  You may be wondering – Do I really need to keep all this stuff?

One of the keys to financial success is being organized.  It is an empowering experience knowing where all your paperwork is and easily locating an important document within minutes.   To help you get started, we’ve provided you with a list of what you need to keep and what you can get rid of.

This is a great time for some spring financial cleaning to put you on the path towards financial success.

What to Keep for 1 Year

  • Paycheck stubs – you can get rid of once you have compared to your W2 & your Social Security earnings statement
  • Utility Bills – throw out after one year, unless using them as a deduction for a home office – then you need to keep them for 3 years after you’ve filed your tax returns.
  • Cancelled Checks – unless needed for tax purposes
  • Bank Statements – unless needed for tax purposes
  • Quarterly Investment Statements – hold onto until you get your annual statement

What to Keep for 3 Years

  • Income Tax Returns – keep in mind that you can be audited by the IRS for no reason up to three years after you filed a tax return.  If you omit 25% of your gross income, that goes up to 6 years and if you don’t file a tax return at all, there is no statute of limitations
  • Medical Bills and Cancelled Insurance Policies
  • Records of Selling a House – needed for documentation for Capital Gains Tax
  • Records of Selling a Stock – needed for documentation for Capital Gains Tax
  • Receipts, Cancelled Checks and other Documentation that Support Income or a Deduction on your Tax Return – keep for 3 years from the date the return was filed
  • Annual Investment Statement – keep for 3 years after you sell your investment

What to Keep for 7 Years

  • Records of Satisfied Loans

What to Hold While Active

  • Contracts
  • Insurance Documents – Homeowner’s Insurance and Auto Insurance Policies until new renewal arrives, then throw out
  • Stock Certificates
  • Property Records – including original Settlement Statement from when you purchased the home, as it shows closing costs and settlement fees paid.  These maybe added to the cost basis calculation when you go to sell your home.
  • Stock Records
  • Records of Pensions and Retirement Plans
  • Property Tax Records Disputed Bills – keep until the dispute is resolved
  • Home Improvement Records – hold for at least 3 years after the due date for the tax return that includes the income or loss on the asset when it’s sold

Keep Forever

  • Tax Returns – You may want to keep your tax returns indefinitely.  The IRS destroys original 1040s after 3 years, but you and your heirs may need information from the returns at some point in the future.
  • Marriage Licenses
  • Divorce or Separation Agreements
  • Birth Certificates
  • Death Certificates
  • Social Security Cards
  • Wills
  • Living Wills and Advanced Medical Directives
  • Trusts
  • Estate Documents
  • Powers of Attorney
  • Deeds
  • Records of Paid Mortgages

A Word About Home Improvement Records and Cost Basis

If you plan to sell your current home at any time in the future and you have made home improvements that add to the value of your home, you should keep all your sales receipts for items purchased for the improvement, (like a sink and the hardware to install the sink), credit card statements showing purchases if no receipt, and checks to contractors.  When you go to sell your home, you will need to establish a cost basis, which is the original cost of the property, plus any improvements made by you, the owner.  You will want to keep these records for at least 3 years after the due date for the tax return year that you sold your home in.

Improvements can be items such as:

  • Remodeling the interior of the home
  • New roof or deck
  • Installing utilities on a building lot (new well or septic)
  • Numerous other improvements performed by the owner, see IRS.gov for more details

 

Mar 21

Have you updated your financial plan yet?

By Chris Chen CFP | Financial Planning

Have you updated your financial plan yet?

As originally published in boston.com:

If we could predict the future, we would always be ready for anything that life throws our way, right?

The truth is that even for what we do know, many of us are not ready. We do know that most of us should probably contribute more to our retirement plans, that we should save for the college fund; and that we should purchase long term care insurance. Yet we don’t do it.

We do know that the sooner we contribute to a retirement plan, the more there will be when we need it. We do know that the more we contribute to the college fund, the easier the burden when our son or daughter goes to college. We do know that the longer we delay buying long term care insurance, the more likely we won’t be able to.

The reason is simple: We are overwhelmed. We are overwhelmed by all the things we know we need to do, and all the other things we need to spend on. We don’t know how to prioritize them.

Yet, imagine that we were to take a minute to prioritize all these very important issues, that we were to realize the benefits of planning sooner, and the penalties for delaying, then surely we would get back on track, wouldn’t we? Plan sooner.

Mar 15

Are your affairs in order?

By Chris Chen CFP | Financial Planning

While it is not  pleasant to think of one’s own passing, having your affairs in order can help ease the burden on friends and family, when the time comes, and can contribute to your own peace of mind knowing that you have done all you can to prepare. There are many factors that should be considered when trying to create an effective and comprehensive estate plan. Some considerations include:

  • Instructions on your own care in sickness
  • Guardians for your minor children should both parents pass
  • Protection from creditors
  • Charitable contributions
  • Continuation of a family business
  • Reducing or eliminating tax
  • Maintaining family harmony
  • Legacy creation and support of future generations

In addition, all these factors should integrate appropriately with your retirement income planning and your investment decisions.

Even if you already have an estate plan in place, you may want to conduct a review. Decisions made years ago may not accurately reflect your current wishes. Estate plans are not for the significantly wealthy alone. If you have children in your care or a business you wish to leave to future generations, it is important that protections and guidance are put in place now and are not put off until your retirement years. It is always a possibility that you may not have the luxury to wait so long.

A poorly executed estate plan, or the lack of one at all, could leave those you most care about suffering needlessly in your absence.  Get ready today to gain control of your estate plan!

Feb 22

Alice in Wonderland and financial planning

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning

Alice in Wonderland and Financial Planning

Those who have read Alice in Wonderland may know the Cheshire Cat as a mysterious and baffling being.  The Cat often makes some very good points, although rarely in a very helpful way.  One is in the picture below.  Unfortunately,  I took it with my phone, and the  text is a little blurry.  So I re-wrote it.

Financial Planning

“Would you tell me please, which way I ought to go from here”

“That depends a great deal on where you want to go” said the Cat.

“I don’t much care where ___” said Alice.

“Then it doesn’t matter which way you go,” said the Cat

“__ so long as I get somewhere,” Alice added as an explanation.

“Oh, you’re sure to do that,” said  the Cat, “if only you walk long enough.”

If you are reading this blog post, chances are you are interested in financial planning.  Alice has taken the first step: she knows she would like to get somewhere, she realizes that she does not know how to, and she has asked for advice.

Hopefully in real life you won’t have to rely on the Cheshire Cat for advice, or any Cat for that matter!  Do remember though: if you walk long enough, you will eventually get somewhere.

Will it be where you want to?

Jan 28

How to Implement a New Year Resolution

By Chris Chen CFP | Financial Planning

How to Implement a New Year Resolution

We are nearing the end of January. How have your New Year’s resolutions survived so far? While we may not be able to help you stick to your gym routine, we can help you with resolutions that include better financial planning and smarter investments. Here are a few things to keep in mind:

  • Make a plan! It is very easy to stray when you haven’t set specific goals for yourself.   We can show you how to get your plan in order.
  • Determine risk. The proper level of risk is different for every investor. We can help make sure you are not taking on more risk than you are willing to take.
  • Consolidate. Are your investment accounts scattered? Combining old or ineffective accounts can maximize your return and make tracking your investments much easier.
  • Know what it is costing you. Beware of hidden fees and costs that can impact your investments. We make sure you are aware of all costs and fees to ensure you know exactly where and how your investment dollars are being spent.

Every good New Year resolution needs a support system. A best friend to keep you honest at the gym. A house mate to give you the eye when you head to the fridge. And a financial planner to guide you to the most informed investment decisions. Contact us so today so we can help you put your New Year’s resolutions back on track.