Taxes and Divorce Archives | Collaborative Law Institute

February 3, 2019

It is important to review and discuss tax planning for the year in which a divorce was completed, especially for high earning individuals who receive incentive compensation and plan to be divorced by December 31, 2018. As part of the 2017 Tax Cuts and Jobs Act, many tax law changes became effective in 2018. One change was to the flat tax rate that is withheld by companies on incentive income such as bonus income, commission income, exercised stock options, and vested restricted stock. As of January 2018, the federal rate changed from 25% to 22%. The Minnesota state rate remains the same at 6.25%. Most highly compensated individuals have marginal tax rates above 22%, so tax on the above income types is under-withheld. To avoid an unpleasant tax surprise come April 15^th, be sure to address this potential additional tax liability and come up with a plan to handle it. Some options to consider are:

Estimate the tax liability now and include and allocate it as part of the property division.
Include language to share in the tax liability when return(s) are filed next year.
Consider whether it makes sense to load-up itemized deductions from the year to the higher earning spouse to help offset liability (i.e. real estate taxes, mortgage interest, charitable contributions).

January 20, 2019

When a joint investment account is divided, the financial institute will use only one Social Security number to report the earnings and thus only one 1099 will be issued for that account. For example, following their divorce, Dick and Jane divided their joint investment account and transferred their own share into an individual investment account solely in their own name, on November 1^st. If the “primary” Social Security number on the joint account is Dick’s, he will receive one 1099 for the joint account earnings earned from January 1^st– October 31^st and a second 1099 for the individual account earnings earned on his individual account from November 1^st – December 31^st. And, Jane will receive only one 1099 for the individual account earnings earned on her individual account from November 1^st – December 31^st. If the goal is to share the tax liability for the joint investment account earnings, this can be accomplished in a few ways.

The tax liability is projected during the divorce process and an adjustment is worked into the property division.
The spouse who received the 1099 adds the investment income to their tax return and language is added to the decree outlining the agreement on how to share the tax liability at tax filing time.
The spouse who received the 1099 can “nominee”the correct portion of investment income to the other spouse by filing a 1099 and 1096 with the IRS and furnishing a 1099 to the other spouse.

January 20, 2017

When divorcing, whether one spouse stays in the family home is often a pivotal decision. For most, there are several considerations that go into deciding whether to sell or stay. The tax impact of selling the marital home is unlikely to be at the top of that list, but with home values on the rise, it is worth understanding. The current tax rules are quite favorable to people realizing a gain on the sale of their home. The IRS allows each taxpayer to avoid paying capital gains tax on the first $250,000 of capital gain on the sale of one’s residence. That means that a taxpayer filing “single” could exempt the first $250,000. A couple filing “married filing jointly” can avoid paying taxes on $500,000 in gains. The capital gains tax on a $250,000 gain can range from $0 to about $75,000 so it is worth it for divorcing couple to make sure they cover this in their divorce arrangements. To qualify for the exemption, the IRS requires that the home meet the principal residence test, which is based on ownership, use and timing. For ownership, you need to have lived in the home for at least 2 years, (24 full months) in the 5 years before the sale. These 24 months do not need to be continuous. The use criteria require that the home be your principal residence for those 24 months. This can be an issue if one spouse was employed in another city, where they kept a second residence. One spouse meets the use test, but the other does not. Finally, the timing criteria requires that you have not excluded the gain on the sale of another home in the past 2 years. Tax law gives divorcing couples some leeway in these criteria. Transfer of home ownership between divorcing spouses is not considered to be a taxable event by the IRS. If ownership is not transferred during the divorce, detailing the home ownership arrangement in the divorce decree is key to minimizing taxes when selling the home later. An ex-spouse that continues to be an owner of the home but does not live there, can still use the exclusion if there is written documentation in the decree that lays out this arrangement. Dealing with home decisions during the divorce can be a complex. Be sure that in your home decision analysis, you are clear on your tax implications! And keep in mind that cabins, vacation homes and investment real estate generally will not meet the principal residence test, so they may have tax consequences when sold. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

April 13, 2016

Determining who is best qualified to help you reach your financial goals, understanding what they can do for you, and getting clarity on how they get paid for their services may be a challenge if this is all new to you. Here are some useful tips to find the right financial professional to help guide you through your financial matters. Designations The finance industry excels at creating financial designations for every conceivable financial situation. If you are looking for a financial planning generalist who can help you with most issues, look for someone with either a CFP^®, ChFC^® or CFA^® designation. A Certified Financial Planner^® (CFP^®) is the dominant designation for financial planners. The Chartered Financial Consultant^® (ChFC^®) designation is similar to CFP^®. A Chartered Financial Analyst^® (CFA^®) is an expert in investment management, but has also studied the basics of financial planning. In addition to one of these designations, many financial advisors who work in the divorce area also have a CDFA™ designation (Certified Divorce Financial Analyst^®). Background Check Once you find some candidates with the right credentials, do your homework and check out their website to see how much experience they have and if they indicate any specialty. You should also look into whether they have had any disciplinary issues with regulators, by performing a FINRA BrokerCheck® search. The Financial Industry Regulatory Authority (FINRA) has a file on every advisor working with a FINRA-registered brokerage firm at www.finra.org/Investors/ToolsCalculators/BrokerCheck Initial Meeting Questions Most financial planners will be happy to sit down with you for an initial meeting at no cost or obligation. The initial meeting is your chance to learn more about the financial planner and their business, to explain your situation and learn what services the planner offers. The following are some essential questions to ask at the initial meeting. What experience do you have? The financial planner may have significant financial experience but it is the experience they have counseling individuals that really matters. What is your approach to financial planning? Ask what types of clients and financial situations the advisor typically works with. For example, a planner that specializes on working with business owners may not be the best choice if you are newly divorced and in need of budgeting help. What services do you offer? Some financial advisors may focus on helping you with your investment needs, where others will also provide comprehensive financial planning (i.e. retirement, education, estate, tax and budget planning). Many planners expect to manage your portfolio along with the other services that they offer. Financial planners may also be good resources for and work closely with tax accountants and attorneys. Do you work alone or with a team? Financial planning is often done with a team approach where several specialists will assist the lead planner. When your financial planner is in meetings, it is good to know if there is someone else in the firm who can answer your questions or take care of basic requests in a timely manner. How much do you typically charge? How do I Pay for your services? Financial planners may charge for their services in several ways. If they are only creating a plan for you, it may be a set project price or by the hour. If they are will be managing your investment portfolio on an on-going basis, they may earn a commission on the investments or a charge a fee based on the size of your portfolio. There are numerous questions that you should consider based on your own situation. Remember that you are under no obligation in this meeting. If you intend to work with this planner over the long-term, it may take more than one meeting to determine if they are the right fit for you. Whatever planner you decide to work with, make sure you know what services will be provided and how the planner will be compensated.

March 15, 2016

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Once you have completed your divorce, the list of things to figure out can be daunting. It can be easy to push off those things that don’t seem to affect your daily routine. Some of those things that you have been putting off are likely financial – a lump sum distribution from the divorce just sitting in cash, a 401(k) in need of rollover or perhaps a credit card balance that never seems to get any smaller. It’s time to make understanding your financial situation part of the process of building a new life. The longer you wait, the greater likelihood that your inaction will impact your long-term financial success. If you don’t know where to start, then it may be a good idea to seek out the assistance of a financial planner. While financial planners may have specialties, the financial planning process is fairly standard for all planners. At the core of the financial planning processes is evaluating your financial needs and goals, and helping you take steps toward meeting those needs and goals. The general steps to the financial planning process are as follows: 1. Determining your financial goals What are you looking to achieve? Do you need to invest that cash in your savings account or rollover a 401(k)? Do you need to figure out how you are going to pay for your child’s college education? Do you need to get a firm handle on your expenses and cash flow? (budgeting) 2. Gathering your information If you have recently completed your divorce, this step should be easy. For your divorce, you needed to collect all of your financial information. You can just pass this information on to a financial planner (bank, retirement, and investment statements, liabilities (credit cards, car loan, mortgage), and your income information, such as a pay stub and a tax return. A copy of your divorce decree also provides pertinent information. 3. Analyzing your information The financial planner will stitch together all of the financial documents in your life to create a picture of your financial situation. 4. Creating your financial plan A financial plan lays out your financial goals and your financial situation. From there, your financial planner will work with you to create a plan of action for meeting your financial goals, based on your financial situation. 5. Implementing your financial plan Your financial plan is going to be a little different from everyone else’s plan. Implementation of a financial plan can take many forms as well. It may involve reallocating your portfolio, setting up a program to save for college, purchasing insurance, or creating a budget. 5. Monitoring the progress of your financial plan In the stock market and life, things happen, situations change. Financial plans are not engraved in stone, never to be changed. They have to be flexible to adapt to the changes that happen in the financial markets and in life. While the financial planning process is fairly standard across the industry, the financial products and solutions recommended by financial planners are not. Much like your physical health, if you are not sure if the recommended products or plan of action are best for your financial health, seek a second opinion. You are more likely to be committed to following a financial plan if you understand the financial products in your portfolio and are certain that your financial planner has put your interests first.

December 8, 2015

Being in the tax season moment, my next few blogs will address some common tax issues and implications resulting from divorce. The first issue/implication I will write about are name changes. It is quite common for a spouse going through divorce to request a name change as part of the divorce process. Requesting a name change can occur for a variety of reasons, divorce being only one. This blog will not attempt to address the reasons but rather focus on actions to take when changing your name. You may be asking yourself what in the world does a name change have to do with my taxes? The answer is plenty. Here are five action steps to take:

Make sure you let your attorney know you want to change your name. It is quite easy for your attorney to order this when filing the divorce decree with the court. There are additional steps you must take to ensure a smooth transition by reporting the change to the appropriate agencies.
The best place is to start with the Social Security Administration. All the paperwork you need occurs when the court enters your divorce decree into the record. This includes the order for the name change. Changing your name with the Social Security Administration is necessary so your new name on IRS records will match up with your Social Security Administration record. Problems arise when processing tax returns and names do not match up. Save yourself some time and headache by reporting the name change to the Social Security Administration immediately upon order of the court.
Be sure to request a new Social Security card by filing Form SS-5, Application for a Social Security Card. Obtain Form SS-5 from www.ssa.gov or call 1-800-772-1213 to order it. You can also accomplish this by going to your nearest Social Security office. The new card will show your same social security number and your new name.
The next step is to notify your employer. If you have not already done so, complete a new W-4 for claiming withholding exemptions factoring your new tax filing status. Remember you will no longer be filing a joint tax return but rather you will be filing as a single individual or as head of household.
Here is a list of other entities to report your name change
1. Department of Motor Vehicles for your driver’s license and update voter registration
2. Passport amendment
3. Health care exchanges If you purchased health insurance through one of these, especially if you are receiving any type of subsidy
4. Financial Institutions where you do business including banks, credit unions, investment companies, insurance companies, loan companies, credit card companies etc.
5. Other businesses such as utility companies
6. Notify the Post Office

Requesting a name change due to divorce is easy. It will save you time and money when completed as a part of the divorce process, rather than waiting until time has lapsed after the divorce.

December 1, 2015

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It will really help your efforts to organize your financial affairs if you know how long you need to keep statements or documents. A survey by Consumer Reports showed that only 40% of respondents thought that they could find a document at a moment’s notice. Only a slightly larger percentage (49%) thought they could find it after looking for a while. An organized and efficient filing system that only holds the necessary documents will go a long way toward removing the stress of keeping track of your financial assets. There are certain essential documents that you should hold onto for the rest of your life – birth certificate, death certificates, marriage license, divorce decree, adoption agreement, military service records and social security card all fall into this category. You should keep the originals for these important documents in a safe place. A safety deposit box tops the list for safety, but is not always the most practical option. Documents that you may use often, such as your social security card, would best be kept elsewhere (in your wallet though is the least desirable location). The best option if you don’t have a safety deposit box, is to purchase a water-proof, fire-proof lockbox or small safe. Other documents that deserve storing in a safety deposit box or lockbox include your most recent estate documents (wills, power of attorney and trust documents), titles to property, savings bonds, and an inventory (with photos) of your significant household assets. Make sure that you make a list of the documents in your safety deposit box or lock box, along with instructions on how to get access to those documents. Give the list and instructions to those who are responsible for taking care of your affairs if something happens to you. Keep your tax returns for 7 years. Keep any documents that are connected to your tax return for the same period, such as the bill of sale for property listed on the return. Also keep your year-end investment statements for as long as you own the investments, and then for 3 additional years after the investments have been sold. Keep the year-end reports from banks and credit card companies for 5 years, and then for 3 additional years after closing the account. The only reason to keep monthly bill statements or credit card bills after paying them is to help you keep track of your budget. Most of this information can be found online if needed also. Shredding is the best way to dispose of statements and make sure that your personal information does not fall into the hands of identity thieves. Properly securing essential documents in a safe place, creating files for property and tax related documents and shredding nonessential documents will go a long way towards clearing the clutter that is blocking you from gaining control over your financial situation.

November 30, 2015

The child tax credit may save you money if you have a qualified child. Here are the top five things to know about this credit as it relates to divorce:

Depending upon your tax filing status and your income you may be eligible for a child tax credit of up to $1000 for each qualifying child you are eligible to claim on your tax return.
An “Additional Child Tax Credit” is for individuals getting less than the full amount of the child tax credit. This “Additional Child Tax Credit”, may give you a refund even if you do not owe any tax.
Qualifications by the IRS the child must pass relating to divorce include:
1. Child must have been under age 17 at the end of the tax filing year
2. The child must be your son, daughter, stepchild, foster child, or your adopted child
3. The child must not have provided more than half of their own support for the year
4. The child must be a dependent that you claim on your federal tax return
5. The child must be a U.S. citizen, a U.S. national or a U.S. resident alien
6. In most cases the child must have lived with you for more than half of the tax filing year
There are income limitations that may reduce or eliminate your ability to qualify for a Child Tax Credit
See IRS publication 972 for more information on the Child Tax Credit

The child tax credit is one way you may be able to lower your out of pocket tax obligation and in some cases even receive a refund if you do not owe any tax. Be sure to consult with a qualified tax preparer to determine your eligibility to qualify for the child tax credit.

November 25, 2015

As part of organizing your financial affairs following a divorce, you should also make preparations for your financial affairs after your death. Planning your estate is an essential part of getting one’s financial matters in order at any point in life, but divorce opens up some interesting issues with estate planning. Minnesota state law has dealt with divorce and the validity of estate documents made while married in an interesting manner. Minnesota statutes Section 524.2-804 states that if a divorced person’s most current will was completed while still married it will be applied as if the ex-spouse died immediately prior to the divorce. The ramifications are that a will remaining from a failed marriage will be applied as if both ex-spouses have died. The property then passes on to the contingent beneficiaries, such as children and siblings. Furthermore, the Minnesota statutes state that the dissolution of marriage also revokes any assignment of fiduciary or representative capacity on the ex-spouse, such as serving as executor, trustee, conservator or guardian. Minnesota lawmakers appreciated the importance of estate planning. The approach these statutes take is to recognize the divorce, but keep the estate documents partially in-force. Nonetheless, while Minnesota law has stepped in to ensure that your ex-spouse does not inherit your property, it has left your estate plan with a lot of question marks. If your ex-spouse is not your executor who is? That is why it is imperative to create a new set of estate documents soon after your divorce, which revokes the estate documents made while you were married. There is a good chance that there are other people besides your ex-spouse named in the estate documents from your marriage, that you would prefer to change. Do you really want your ex-spouse’s brother handling your financial affairs? So many people delay estate planning because they don’t want to think about their death. The fact is, estate planning is more about your assets, your family and your friends. It is an opportunity to think about how you would like your assets distributed to reflect the new you and your wishes. There is also peace-of-mind that comes from knowing you have made arrangements so that your death doesn’t cause your family any more stress than it has to. In coming blogs, we will discuss the important aspects of estate planning in more depth, so that you can tackle the process with an appreciation of the gift this can be for your loved ones.

November 23, 2015

As another tax season comes to a close, there are people all over the country digging through shoe boxes and file cabinets trying to meet their tax accountants’ request for cost basis information on an investment they sold last year. Hundreds of thousands of tax returns are moments away from being filed if only the taxpayer could find that elusive cost basis information. So what is cost basis, why is it so important, and why can’t anyone ever find it? At its simplest, cost basis is the purchase price you paid for an investment or piece of property. More than that, it also includes the expenses that went directly into the purchase including commissions, trade fees, appraisal and legal expenses. Cost basis can also grow over time due to reinvested dividends on mutual funds or if you made significant improvements to your property. When you sell an investment or property, cost basis is vital for figuring out if you made or lost money on the sale. The IRS wants to know your gain on the sale and expects you to pay taxes on it. If you lost money on an investment, it is important to report that as well. The loss will almost always be subtracted from your gains on other investment sales thereby lowering your tax bill. The IRS puts the responsibility for keeping track of cost basis on the owner of the investment or property. Maintaining good records on investments in particular seems to be impossible for all but the most organized. With the blizzard of paperwork that the investment company sends aren’t they keeping track of this? Yes and no. Prior to 2011, the investment companies kept track of your cost basis but they were under no obligation to transfer that information if you transferred your assets to a new investment company. Statements at your new investment company would only reflect the cost basis of investments purchased through them. As of 2011, all investment companies are required to transfer the cost basis information when transferring assets. Unfortunately, if an account has been moved a couple times prior to 2011, the cost basis of some assets is only known if the owner still has the records of the original purchase. Anyone one with a brokerage account (not an IRA which gets taxed differently) or investment properties needs to keep good records of their purchases and related expenses. While investment companies are finally doing their part, it will be years before all the investments purchased before 2011 with missing cost basis information are sold and people can throw out those shoeboxes of old statements. For anyone splitting up assets in a divorce, it is important to get the cost basis information during the divorce process. Make sure to get a statement of any investment account being split. Also make sure to get all the expense receipts for any investment properties that are being transferred. If you get this information during the divorce, you don’t have to go asking for it later only to find that the statements got thrown out during moving or mysteriously “disappeared”.