Has Your Spouse Changed Their Financial Habits? Divorce Might Be Next!

money

While divorce rates hover around 50% for first time marriages (and higher than that for subsequent unions), the reasons for splitting up often center around finances. Disagreements over what to spend and how much to save are often blamed for the failure of a relationship.

But finances play another role in divorce, too, according to a recent report in Barron’s. A change in financial behavior might signal that divorce is on the horizon.

Things to look out for?

·     Account statements, tax returns or other financial documents go missing.

·     A spouse who has been hands’ off with finances suddenly taking an interest in household money management.

·     One spouse suddenly acquiring new credit lines.

·     Statements from unfamiliar financial institutions begin to arrive, or passwords to existing ones are suddenly changed.

·     Changes in the contribution amounts to retirement accounts without explanation.

While these signs don’t always point to divorce on the horizon, they do at least merit a frank discussion between spouses.

Source: Has Your Spouse Changed Their Financial Habits? Divorce Might Be Next | Robert Hetsler,J.D. CPA,CVA,CFF,FCPA,MAFF,CMAP,PFP | Pulse | LinkedIn

5 tips for making sense of taxes after a divorce

tax return divorce

tax return divorce

Did you know that, in America, there is one divorce about every 36 seconds? That’s nearly 2,400 divorces per day, 16,800 divorces per week and 876,000 divorces per year.

With tax season upon us, that means approximately 876,000 people are newly navigating the realm of post-divorce taxes. Taxes are complicated enough as it is, but when you add in assets, dependents, alimony, child support and other freshly split obligations, filing can be downright daunting.

Here, the five most important things to keep in mind when facing this new challenge.

1. Marital status is set as of Dec. 31, not April 15

If your divorce was finalized after Jan. 1 but before you filed your taxes, you are still officially married as far as your 2014 taxes are concerned. In other words, your marital status as of Dec. 31 determines your filing status for that entire calendar year.

Although you cannot file jointly, you may be able to file as a head of household, depending on particular qualifiers such as length of cohabitation, cost of home upkeep, et cetera.

2. Home is where the taxes are

Upside: You don’t have to pay taxes on transferred property in a divorce, and if you’re retaining the residence, you can claim the mortgage interest deduction.

Downside: Now that you’re single, capital gains exclusion laws work less to your advantage. As a result, if you eventually decide to sell your home, your profit from the sale may be significantly reduced.

3. Alimony is tax deductible, with some caveats

In most cases, alimony is tax deductible for the party paying it; in fact, it’s an above-the-line deduction, meaning it does not need to be represented as an itemized claim. However, a few conditions should be kept in mind:

  • Alimony payments made while both parents of the child are still living together are not tax deductible.
  • While cash, checks and money orders meet alimony standards, property contributions do not.

4. Custodians clean up on tax returns

Modern custodial agreements rarely designate a sole custodian, which makes taxes a little more difficult. Typically, the custodial parent is considered, by default, the parent who has physical custody for most of the year. However, many couples now alternate who claims custody each year in order to share the tax benefit.

Also, keep in mind that child support is always tax-neutral, which means that even if you’re paying it, it is not tax deductible in any way.

There’s one little loophole, however. If you continue to pay a child’s medical bills, even without custody, those costs can be included as a medical expense deduction.

5. Be careful with your 401(k)

Your retirement should be handled with the same care it took to earn it. Cashing out a 401(k) to use in a settlement is subject to taxes; however, this tax trap can be avoided if the transfer is done under a qualified domestic relations order, or QDRO. A QDRO grants your ex-spouse the right to the funds without the imposition of taxes.

As always, if you have any doubts about how to file your taxes due to a divorce, contact your attorney and your accountant. They are best qualified to give advice for your unique situation.

Source: 5 tips for making sense of taxes after a divorce

Tax Issues And Divorce – Part 1

http://divorcetransitionalsupportadvisor.com/tax-issues-and-divorce-part-2/

divorce taxAs if divorce doesn’t cause enough emotional and financial turmoil, every person going through a divorce must also consider a variety of tax issues that arise once a marriage ends. Many of these issues can catch a divorcing spouse off guard. It is important to understand these tax pitfalls in order to make sound decisions and avoid unnecessary troubles down the road.

Alimony is Taxable to the Recipient

With some exceptions, spousal support paid by one party to the other is usually considered a taxable event for both. This is crucial to understand because it causes a tax liability for the payee spouse and a tax credit for the payor spouse.

The IRS sets forth specific criteria in order for a payment between spouses to qualify as alimony:

  • The spouses do not file a joint tax return with each other
  • The payor spouse pays in cash (including checks, bank transfers or money orders)
  • The payment is received by (or on behalf of) the payee spouse
  • The divorce or separate maintenance decree does not state that the payment is not alimony
  • If legally separated, the former spouses are not members of the same household when the payment is made
  • There is no liability to make payments after the death of the payee spouse
  • The payment is not treated as child support or part of a property settlement

Who Gets the Dependency Exemption for the Minor Child

The IRS presumes that the custodial parent will receive the dependency exemption for any minor children of the divorcing couple. A custodial parent is defined as the parent who has the minor children for the greater portion of the calendar year. This presumption can create a situation where one parent always gets the deduction, year after year, providing significant tax savings to him or her.

However, the dependency exemption can be allocated by agreement of the parties or by court order. In such cases, the parent relinquishing the dependency exemption is required to sign IRS form 8332, which is then attached to the non-custodial parent’s tax return in each year that he or she claims the exemption.

See Part II of this article.

Source: Divorce Transitional Support Advisor – Tax Issues And Divorce – Part 1

Money Tips for You After Divorce Settlement

Tips for Financial Security After Divorce Settlement

divorce finances

Meet with an Lawyer

Even if you’re hoping for a simple divorce, you can still benefit significantly from consulting an attorney who specializes in divorce law. A lawyer can be objective, advising you of your rights, obligations and options and walking you through issues surrounding alimony, child custody and a divorce settlement. During this emotional period, an attorney will be able to help you focus on critical details regarding your divorce finances.

Estimate what you and your spouse are worth

The court may require a list of all marital assets and liabilities you and your spouse have jointly and separately. You should:

Once you’ve accounted for all assets, list each of them under one of three categories:

1.  Your pre-marital assets (things you brought into the marriage).
2. Your spouse’s belongings.
3. Marital property, or property acquired during the marriage.

The court will decide how to “equitably” divide marital property. Pennsylvania laws does not automatically define “equitably” as “equally.” The court and applicable law will also determine the ownership and division of all property and the responsibility for debt incurred during the marriage.

As an aside, if your marriage is in trouble, from this point on, it might be a good idea to postpone new and large purchases as well as the assumption of any new debt.

Review your Income and cash flow

After divorce, you’ll be a single person and maybe even a single parent. Financially, things will be much different from the way they’ve been, so it’s important to estimate your cash flow after the divorce, so you can plan for your new financial reality. You should also try to forecast future income to enable the court to determine child custody and alimony payments.

Give serious thought to creating a post-divorce budget as a tool for managing your money going forward. A budget can help you determine how you will need to scale back your lifestyle.

A budget can also help you focus on the income side of your cash flow. For example, you might realize that after the divorce, you will need to find a higher-paying job, or go to work if you’re not currently employed. You may even decide to go back to school as a way of enhancing your future income potential.

Review your insuranceinsurance divorce

Make sure you will have adequate health, disability, and life insurance coverage after a divorce. If you’re currently covered by your spouse’s employer-provided health plan, you can usually keep existing coverage for at least 36 months after a divorce under the Consolidated Omnibus Reconciliation Act (COBRA). You will have to pay premiums for COBRA coverage, and the premiums will probably be much more expensive, so you need to account for them in your post-divorce budget.

If you’re employed but don’t currently use your own employer-sponsored health plan, consider signing up for it. A group policy at work is typically much cheaper than an individual policy purchased on your own. Employers typically do not permit you to sign up for health insurance mid-year, but if you’ve experienced a major life event like a divorce, it may be possible.

After a divorce settlement, remember to review and, if necessary, change beneficiary designations on your life insurance policies and retirement/investment accounts, as permitted by court order. Definitely discuss your situation with a financial advisor

Your attorney may be able to provide limited guidance on financial issues. However, for broader assistance with the financial aspects of a divorce settlement, consider consulting with a financial advisor. He or she will also be able to guide you through longer-term financial planning, which might address issues like debt reduction, education funding, retirement planning and estate planning.