When Divorce Gets Sticky

Let's face it – divorce is not fun. Almost no one considers this process to be enjoyable, or sets out to go through a long and contentious divorce proceeding just for kicks.

However, some divorces can be a lot worse than others. There are some pretty common factors that make some divorces relatively easy, and others into long, protracted nightmares. The details matter! When assets can be entangled, and families reconfigured, without a lot of contestation and acrimony, everyone’s better off – but that’s easier said than done.

An orderly process is worth a lot in divorce proceedings. Any seasoned divorce attorney knows this, and so do many people who have been through these proceedings as clients. It’s incumbent on the divorce attorney to help clients to understand both their rights and their obligations under the law, to promote a smoother, less unpleasant process.

We know that divorce proceedings tend to involve high emotions on one or both sides. Custody battles are not infrequent, and the splitting of assets can be pretty complicated and involve quite a bit of feeling. Couples who have done nearly everything together have to get used to the idea of doing things apart. That’s a tall order for most couples, and on top of that, there’s the law; good legal counsel is based on helping to navigate that other layer of legal complexities that apply.

Financial Resources

At Financially Independent Transitions, we take care to maintain a consultative approach with our clients to help them navigate these often tricky financial processes. With CDFA (Certified Divorce Financial Analyst) designation & Enrolled Agent designation, we have the acumen to represent our clients before the IRS, but we also have the philosophy of being by your side as divorce proceedings play out. It's critical to remember that although some aspects of divorce happenings take place in a court, others take place outside of that legal context and the two tend to affect each other to a great extent.

We offer resources like weekly dispatches on our website, and other informative guides, so that our clients can, in a sense, “self serve” a bit in discovering how to work through divorce. We're always on call, but we also seek out good supplementary resources for our clients that can help people to manage conflict in a healthier way, understand their assets better, and generally fare better in divorce proceedings. Get excellent, qualified tax & financial counsel from Financially Independent Transitions in a dedicated, caring environment.

Four Mistakes That Could Cost You Thousands of Dollars in Your Divorce...And How to Avoid Them

We see a lot of divorce decrees in our office. When I say a lot, I mean, a lot. Invariably, we see a lot of financial mistakes in those decrees too.  While every state is different, federal law reigns supreme. If this is your first tax season post-divorce, or if you are in the middle of your divorce proceedings, paying attention to these four most common mistakes will pay huge dividends later on.

Don’t forget IRS form 8332

IRS form 8332 (release/revocation of the release of claim to exemption for child by custodial parent) is a crucial form if you have dependent children eligible for child tax credits. If the non-custodial parent is going to claim the above-mentioned tax credits, the custodial parent, pursuant to your decree, must sign and release IRS form 8332 to the non-custodial parent.  The non-custodial parent retains this form as proof they can claim the tax credits. For most couples, this form is signed every year. You can find it here: https://www.irs.gov/pub/irs-pdf/f8332.pdf

Don’t forget the Other Dependent Credit

The Tax Cuts & Jobs Act, which started in late 2017, but mainly applicable in 2018, has substantially changed the tax landscape. This is particularly true for divorcees and soon-to-be divorcees. Because of the broad changes to the tax code, many divorce decrees are incongruity to these new laws. The Other Dependent Credit is a $500 non-refundable tax credit for dependents older than 17 that do not qualify for the child tax credit. Generally, we see two situations:

1. Divorce decrees enforced prior to the law change generally do not address the Other Dependent Credit. Sometimes the language in the decree is written too specific to accommodate the old laws and states that the exchange of tax credits end when the youngest child turns 17. If this is your situation, you and your former spouse will need to either work together or modify your decree in accordance with the new laws.

2. Too many attorneys do not understand or are unaware of the new tax law. We are still seeing new decrees where the language does not jive with the new tax laws.  Having a federally licensed Enrolled Agent or CDFA® on your divorce team, or as a financial neutral, can help you avoid these mistakes.

Don’t Forget Who Get’s to Claim the Child & Dependent Care Credit

If you are a working professional & have young children, it’s quite possible those children are in some form of daycare. As you may know, daycare can be extremely expensive! The IRS provides a tax credit where you can get 20% to 35% of up to $3,000 of child care & similar costs for a child under 13, an incapacitated spouse or parent, or another dependent so that you can work (and up to $6,000 for two or more dependents).

What happens in a divorce when both parents are sharing this cost? Can both parents claim this credit? Can it be rotated every other year?

The IRS is very specific that a qualifying person may only be claimed on one tax return. If a dependent is claimed on more than one tax return (for example, a child is claimed by both divorced parents) the IRS will apply a set of tiebreaker rules to see who gets to claim the dependent.

Alimony: Is it taxable?

Pursuant to the Tax Cuts & Jobs Act of 2017, alimony is no longer considered taxable income for any decree signed in force after midnight, December 31, 2018. If your divorce was finalized prior to this date, then you are subjected to the old laws & will continue to report alimony as usual.

But what happens if you are under temporary orders, receiving payments but in a lengthy divorce proceeding that hasn’t finished but started prior to the cut-off date mentioned above? What happens if you or your former spouse takes you back to court with the intent to modify your alimony payments?

The answer here is not so clear cut.  To help in these more complex situations, the IRS clarified the definition of a divorce instrument to include:

• A decree of divorce or separate maintenance or a written instrument incident to such a decree.

• A written separation agreement.

• A decree (not described in clause (i)) requiring a spouse to make payments for the support or maintenance of the other spouse.

Additionally, if you read the actual bill, there is a section that clarifies how divorcing couples can deal with these situations:

“any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.” Source https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

From a tax perspective, as we read the bill, we interpret this to mean that should a final decree signed prior to the law change be modified after December 31, 2018, the parties can choose whether or not be subjected to the old law or the new law. What’s the bottom line? Consult your attorney & a tax advisor if you’re in this situation.

4 of the Biggest Divorce Questions

As a professional and established firm helping with divorce scenarios, at Financially Independent Transitions, we hear a lot of the same questions from clients. Here are some of the top questions that those who are going through a divorce need to have answered:

Who Gets What?

This question is laughably simple, in some ways, and really has to be answered in a more complex way, after doing some research on the individual case.

Of course, that question is at the top of the list for many of these parties to a divorce who are wondering what the asset split is. You hear a lot about dividing everything half-and-half, but it's really a lot more complex than that. It depends on a variety of factors, including the context of the family life that existed prior to the divorce. We help our clients to navigate all of that complexity to figure out what the final result is going to look like.

Which of My Assets Are Shielded From Loss?

Different states have different rules on the splitting up of personal assets in the divorce. For example, what about inheritance money or other windfalls?

Again, it's best to approach these questions on a case-by-case basis. We’ll work with clients to come up with a game plan and explain why some assets may be treated differently than others.

What About the Value of My Work?

One issue that comes up a lot in modern divorces is the work history of the two parties involved.

So often in today's society, one of the partners will give up specific career goals in order to raise children. Ideally, and in many cases, the parents collaborate on raising the children, but ultimately, one often provides more of this service than the other, and it can have an impact on that person’s career and work life.

As a society, we've moved a certain way toward valuing the work in the family home, but there are still a lot of issues with how this is done – which lead to those common client questions. We often help our clients to understand this process better.

I Paid (x) Bill: Now What?

Often we hear from a spouse who has made the majority of the mortgage payments on a home or other jointly owned property. We hear from spouses who have paid the lion's share of the utility bills, or property taxes or other costs. They have certain expectations, then, when it comes to dividing up the assets.

This is another common question that takes some particular thought to address. It’s not always cut and dried – in fact, in most cases, it’s not!

Have questions? Contact us and ask about what you can expect in a divorce.

Important Financial Steps to Take Before Filing for Divorce

It’s estimated that approximately 50 percent of all marriages will end in a divorce. This means that if you are married, there’s a 50/50 chance you will be filing for a divorce eventually.

When you make the decision to file for a divorce, you may not be thinking about your finances right away. After all, the psychological burden of your marriage coming to an end can be something that is all-consuming, which makes it difficult to think about anything else.

Also, the costs that are associated with divorce, such as legal fees and selling a home, can be complex and stressful. However, before filing for divorce, it’s a good idea to make specific financial decisions, which can help ensure you emerge from this difficult process on solid, financial footing.

Before you file the paperwork for a divorce, make sure to make the following financial moves.

Take Inventory of Your Financial Situation

A crucial thing that you can do if you are thinking about filing a divorce is to take a long hard look at your financial situation. This includes factors such s your salary, loans that are in your name, how much you have in your bank account, insurance policies, retirement accounts, credit card balances, and more.

You need to take time to account for all of your current assets and liabilities. Knowing what you owe and what you own can be invaluable when going through a divorce. It’s also important to get all this pertinent financial information organized. That’s especially the case because you will eventually have to sign a financial disclosure statement.

Check Your Credit Score and Your Credit Reports

You need to know your credit score and your credit reports before you file for divorce. Take some time to look at your overall credit history and figure out what your score means. This is extremely important if you have left handling the financials to your spouse.

If your spouse has been the one to take out loans and get credit cards, you may have a low credit score and not even realize it. As a result, it you attempt to purchase a vehicle after you get a divorce, you may not be approved, simply because your credit history is non-existent.

Look into Your Spouse’s Finances

In many marriages, there will typically be one spouse that handles most of the financial issues. If you don’t understand your financial situation, it can put you at a disadvantage during the actual divorce proceedings. Now is the time to learn about your spouse’s situation, before you move forward with this process.

In most cases, if you are planning to file for divorce, the best thing you can do is to work with a team of professionals who will keep your best interests top of mind. Usually this includes an expert on divorce finances and a divorce attorney. By getting your finances straight now, you can avoid problems as the divorce moves forward.