Category Archives for "Divorce Planning"

May 30

The IRS thinks you are cheating on your Spousal Support

By Chris Chen CFP | Divorce Planning , Financial Planning

 

The IRS thinks you are cheating on your spousal support

Spousal SupportAccording to the Journal of Accountancy, the IRS has increased resources devoted to scrutinizing alimony, or spousal support.  

As is well known amongst divorcing individuals and the professionals who support them, the tax code allows the payor of spousal support to deduct it from taxable income, while the recipient must include it in taxable income. So if Kevin pays Kate $30,000 of spousal support a year, he can reduce his taxable income by that amount while she is supposed to claim it as income, and pay taxes. 

Predictably, divorced couples don’t agree about spousal support any more than they do about anything else. On March 31 2014, TIGTA , the Treasury Inspector General for Tax Administration, an IRS watchdog, issued a report identifying a large tax gap between spousal support deductions by payers and the corresponding income claimed on ex-spouses’ returns.

With its mouthful of a title (“Significant Discrepancies exist  between Alimony Deductions Claimed by Payers and Income Reported by Recipients“), TIGTA clearly wants us to pay attention.  TIGTA found that for the 570,000 returns that they analyzed for the tax year 2010, deductions exceeded income by more than $2.3 billion. More than 47% of returns showed discrepancies between the spousal payments deducted and the income reported.

According to Mike Conti, a CPA in Boston, TIGTA estimated that the IRS revenue loss from spousal support errors could add up to $1.7 billion over a five year period. Although that is small compared to the estimated $385 billion tax gap experienced in the US, spousal support is now a target for the IRS that has been identified and quantified. 

In fact, the IRS reported adjusting its audit filters to catch more high risk returns. The WSJ reports that the IRS is developing “other strategies” to address the spousal support tax gap. In other words, divorcing individuals, at least those paying and receiving spousal support will be at a higher risk for an audit.

There are enough things going on in a divorce that a potential IRS audit may not make it to the top of the list of concerns.  However, given that it is now completely predictable, it is better for divorcing individuals to pay the extra attention and avoid the audit or be ready for it.

For people paying spousal support as well as for those receiving it, it is important to ensure that:

1. You fully understand what is alimony and what is not. Separation agreements are written in a legal style that is not always clear to non-lawyers. If you are not sure, if you have questions check with a financial specialist such as a CFP® professional, a Certified Divorce Financial Analyst (CDFA) or a CPA.

2. You agree with your ex on what spousal support amount you are putting on your respective tax returns. Having a discrepancy between what he files and what she files could put both of you at greater risk for an audit.

3. Your separation agreement correctly specifies spousal support. If it does not and you get audited, alimony could get disallowed. If you have not done so already, take the opportunity to verify that your separation agreement correctly specifies spousal support.

4. You get professional post-divorce support. You will need it anyway for any number of other issues. Analyzing spousal support and filing taxes correctly are just two of them.

5. Avoid pushing the envelope on this issue. It is simply not worth the additional aggravation. 

(a version of this post appeared on boston.com)

 

Aug 15

Divorce and Empowerment

By Diane Pappas | Divorce Planning

Divorce and Empowerment

"Pareja" by Daniel Lobo on Flckr, License to Share under Creative CommonsAre you financially empowered? To answer this question, one must first know what it means to be financially empowered. The definition of the word empower is: to enable or to promote the self-actualization or influence of. Becoming knowledgeable about your finances can be an empowering experience, enabling you to realize a more secure financial future. Being financially empowered means making informed and effective decisions about the use and management of your money. Having the knowledge, skills and access to appropriate tools to effectively manage your finances, will help you and your family improve your long-term financial well-being.

But, if you are currently going through a divorce, your ability to make informed decisions about your financial future may be compromised, especially if you do not have a clear understanding of your finances.

One way towards empowerment during the divorce process is to seek the help of a divorce financial professional. A Certified Divorce Financial Analyst™ (CDFA), can become a valuable member of the divorce team, working closely with you and your attorney or mediator, to ensure that the proposed settlement works best for you and your family based on your particular financial situation. A CDFA™ can provide you with peace of mind knowing that all the different options were analyzed with respect to maximizing the available assets and minimizing any negative financial impact.

Many couples facing divorce are filled with fear of the unknown. Most of that fear lies in not knowing what their financial life will look like after divorce. Will I end up a bag lady? Will I be living paycheck to paycheck unable to ever enjoy life again? The best way to alleviate that fear is to know ahead of time what your financial life might look like. Using sophisticated tools, a divorce financial analyst can provide you with a projection of your future financial life. Knowing what your life might be like 5, 10 or even 20 years from now, will help to bring about the clarity and insight necessary to make those important financial decisions.

Clarity can only be achieved when each spouse fully understands what their needs are, what financial resources are available to them and what their options are with respect to different settlements and future impacts. From understanding what your new monthly expenses are going to be, to seeing the impact of the proposed asset split on long-term retirement projections, to understanding your options with regards to keeping or selling the marital home, being empowered with this important information will put you in control of the decision making.

Taking control of your finances will empower you through the divorce process, making it easier to transition into post-divorce life. While the emotional issues will still be present, knowing that you did the best you could with the resources available to you, should allow for the healing to take place. No one wants to worry about money, and when children are involved, it only creates more stress and heartache. Let a divorce financial professional help you achieve financial empowerment from the beginning so that your financial needs and concerns remain the centerpiece of your divorce settlement.

Jun 26

Overturning DOMA

By Chris Chen CFP | Divorce Planning , Financial Planning

Some financial impact from overturning DOMA for same-sex couples 

Overturning DOMAToday, the Supreme Court struck down the Defense of Marriage Act (DOMA), the 1996 federal law prohibiting married same-sex couples from receiving federal benefits.   According to Justice Kennedy who wrote the majority opinion “DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.”

For states such as Massachusetts where same-sex marriage is legal, federal benefits that were previously unavailable can now be accessed by married same-sex couples.  Many of  the benefits are financial or have a financial impact.  For instance, with DOMA overturned, same-sex couples will now have the ability to file taxes jointly, or to qualify for social security benefits. In addition, same-sex couples can now simplify their legacy planning, since they will be subject to the same rules as opposite-sex couples.

Same-sex couples who divorce  will now be able to get the same benefits as opposite-sex couples.  For example, same-sex divorced couples can now divide property without incurring gift taxes.  When alimony is paid, the payor may now deduct the payments from taxable income.

Divorced same-sex couples may need to revisit their separation agreements.  For those people who have an alimony arrangement, as the alimony amount can now be deducted from the payor, it will also become  taxable to the payee.  Hence the amounts may need to be recalculated to take that new fact into account.   People who have had to pay gift taxes as a result of a property division pursuant to divorce may be able to reclaim those taxes.

These are exciting times for same-sex couples.  Life without DOMA will be easy to settle day to day.  For financial issues, such as financial planning and tax planning it may take a little more adjustment.  Make sure to contact your CFP and CPA for more details.

 

Jun 17

Start an Emergency Fund

By Chris Chen CFP | Divorce Planning , Financial Planning

Start an Emergency Fund

This week I wrote the following short piece for the Boston Globe:

 

Many people have trouble putting together an emergency fund. After all, there is always something else to spend money on! These are often small items, small fees and small purchases that go unnoticed. However, they add up. What if you could limit your purchasing of these small items, and put your extra cash into a rainy day fund instead?

Here are some ideas:

1. Consider giving up your daily Dunkin’ Donuts or Starbucks habit. At $3.05, a cappuccino may not seem like a lot, but one every 251 working days in the year adds to $765. What small expenses do you incur every day that adds up?

2. AT&T and Verizon will charge you $199.99 for the new iPhone5 or the newer Samsung Galaxy 4 with a two year contract. The truth is most of us want the new hot phones and their fancy features. How long will these phones stay “hot”?

3. Pack your lunch: a sandwich or a salad at Panera will set you back $9 a day, or $2,259 a year.

4. Carpooling is great. Biking to work is better: It will not just save you gas, it will make you healthy too. Have you tried Boston Bikes yet?

 

http://www.boston.com/business/personal-finance/2013/06/14/raining-pouring-how-start-saving/0h0ktD2nYBSVEZ6ILO6nxM/story.html?pg=2

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.

 

Other posts you may find interesting

Pension Division in Divorce

4 Risks of Pension Plans in Divorce

Post-Divorce Investments 

 

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 04

Inaugural Post

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

Welcome to the Insight Financial Strategists LLC blog! As this is our inaugural post, let’s start with the basics. First, an introduction: Our company was created as a knowledge center tailored to helping you assess your specific financial planning needs. This personal approach to financial planning helps us in designing financial plans specific to your needs and financial goals.

All of us know about money and finance, but most of us don’t know it very well. We are often uncertain about how much we need to save for the future, and how we should invest it.

And if that weren’t enough, we often feel overwhelmed by fluctuations in the marketplace, the daily squawk box of financial news, and tax laws that are ever changing. Case in point: as we write this post, we stare at the Fiscal Cliff, we wonder what impact it will have on us, and we sit mesmerized.

Let’s face it: the world is a mess; it’s confusing, even frightening. And would it not be wonderful if we could turn to someone who could guide us through this confusing mess?

At Insight Financial Strategists LLC, our team offers you our deep and focused expertise and insight to guide you in making informed decisions and giving you a solid foundation of understanding on which to plan. Regardless of whether you are looking forward to your retirement years, are in the midst of a long divorce or just need to make sure you are doing the best you can with your current financial planning picture, Insight Financial Strategists can help you navigate confidently through it all.

Our team is small, allowing you to get to know us as we get to know you, without the fear of getting lost in the shuffle of a large corporation. Our services are one-on-one and we know the local landscape. Please feel free to visit the About Us page on our website to learn more about us.

While you are on the site, please sign up for our newsletter to receive the latest news and analysis to help ensure all your financial decisions are informed ones. And, of course, be sure to check back here on our blog. We will provide you with our analysis of financial trends, let you know about upcoming events and feature guest bloggers to offer fresh perspectives on pressing issues.

Every financial situation is unique. Please be sure to contact us so we can provide the most accurate and customized information we can for your personal financial situation.

 

~ The Insight Financial Strategists Team