The Faggio Financial Blog

Women and Divorce - Warnings from a Divorce Financial Analyst

Posted by John Faggio, CPA, CFP, CDFA on Thu, Aug 25, 2016 @ 04:04 PM


Researchers for a University of Utah Report on Divorce cite the following statistics:

  • About one in three women who own a home and have children at home when they divorce lose their homes.
  • Three of four divorced mothers do not receive full payment of child support
  • About one in five women fall into poverty as a result of divorce

The Report goes on to say " Women at the crossroads of divorce should evaluate their financial situation carefully. Good preparation for the financial challenges of divorce is important to minimize its negative effects."

In my twelve-year experience as a Financial Divorce Specialist, I have observed significant differences in the manner in which men and women face the divorce process. Although both can let emotions get in the way of making good decisions, my experience shows that women face different and larger challenges in the negotiation process. 

For women to financially survive their divorce and thrive post-divorce, you may want to heed the following warnings.

Magnifying_class_reduced_blog_11_2013-resized-600.jpgUnderstand that your marriage has morphed into a business deal

Sad but true and whether you’ve been married for 10, 15, 20 years or more, your family finances will be whittled down to an enforceable Property Settlement Agreement; and, you cannot expect your spouse to look out for your interests. It may be difficult to think about separate accounts or removing your spouse’s name from charge cards; however, YOU are at risk any time you hold a joint interest in, or have legal responsibility with, or are financially dependent upon your ex-spouse.

What happens in the future if your former spouse defaults on payments, becomes disabled, goes bankrupt or dies. You should consider these possibilities that could have a significant impact on your financial position and take appropriate measures to protect your interest (and that of your children).

Woman_under_pressure.jpgDo not succumb to pressure to sign an agreement

Keep telling yourself, "once I sign, it's over; there's no turning back." It is difficult to financially rebound from a divorce and the more information that you have prior to signing an agreement, the better your outcome will be. "But I cannot afford an attorney and/or a financial divorce analyst."

Many divorce attorneys and divorce financial plqnners will conduct initial consults at their hourly rate. You do not need thousands of dollars upfront for a Q & A session.

An initial investment of $300-$500 may produce $1,000's of dollars in support or additional marital property. The divorce advice you receive may also provide you with the peace of mind that you are making the best decision for you and your family. Ask if the professional will work on a fixed-fee basis. What are the other alternatives to pay for fees?

  1. Ask relatives or friends for a short-term, bridge loan
  2. Apply for credit based upon your joint income, if you are still "jointly" paying bills
  3. Sell unneeded personal property*
  4. Borrow from an employer retirement plan
  5. Cash in any Roth or Traditional IRAs*

*These can be accounted for in the final agreement in an equalization of assets.

img-team1.jpgHire a Divorce Team (Mental Health Professional)

Divorce is a 3-legged stool consisting of the legal, financial, and emotional issues. If done properly, the total cost of your divorce will be much more cost-effective if you hire experienced and skilled specialist in each field.

Let's look at your attorney as your GP Doctor. He or she says that you need brain surgery. Do you want the GP to do the surgery? In this situation, you ask for surgeon referrals and the GP follows up with you at a later date. It is the same with divorce.

Divorce attorney practice Family Law. The reality is that they can grow weary of hearing how bad your soon to be Ex behaves and, they're listening to and billing you at probably at least two times the rate of a mental health professional. Get referrals for these specialists and work out your emotional issues with them prior to or during settlement discussions.

 

Colored_NW_Slide_Lightened_Better_Deal.jpgHire a Divorce Team (Financial Divorce Specialist)

Certified Divorce Financial Analysts™(CDFAs) and Financial Divorce Specialists are trained in the legal, financial, and tax issues of divorce. Their focus is on how you will financially survive your divorce under various settlement scenarios. Through financial analysis, they become your safety net providing supportable responses to these questions and more:

  1. Am I going to be financially ok after the divorce?uncertainty-resized-600.jpg
  2. When or will I be able to retire?
  3. How will my family financially survive post-divorce?
  4. How much support do I need - short-term, long-term?
  5. How much will I have to pay in income taxes?
  6. Should I take the home or retirement funds?
  7. What can I afford to pay for housing, post-divorce?

                         Download our Financial  Divorce Survival Checklist             

                         

CDFAs and CPAs need continuing education hours to maintain their licenses. These classes keep them abreast of current trends and financial and tax strategies in providingdivorce financial planning for their clients.

Women, especially those who have been "kept in the dark" about the family finances, face more and steeper challenges than men. Being aware of the financial pitfalls and engaging the services of a CDFA™ could make the difference of just surviving or thriving after the divorce.

Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that can put you on the right path to a positive outcome in your divorce.


 

Tags: CDFA, Maryland Property Settlements, costs of divorce, women and divorce, divorce team

Divorce and Money – 5 Potentially Bad Divorce Decisions (and how to avoid making them)

Posted by John Faggio, CPA, CFP, CDFA on Wed, Aug 26, 2015 @ 08:37 AM


uncertainty-resized-600

Going through the divorce process can be one of the most emotionally challenging and financially draining experiences in one's lifetime. Going it alone or excluding a Financial Divorce Analyst from your divorce team can lead to bad decisions that will have a negative impact on your future financial security.

Here's a short list of the potentially worst decisions that individuals have made and continue to make as emotions take hold.



1. Trading your share of your spouse's pension for their share of the Marital Home

Family_Home_Small-2Guaranteed future benefits, especially those provided for Federal and State employees, are becoming a rarity nowadays. So although the present value of the pension may, in fact, be equal dollar-wise to 50% of the home's equity, you are giving up a Guarantee of future income during retirement. This is something that real estate cannot provide. For the former spouse who is keeping the pension benefit, consideration should be given to the after-tax value of the trade. While I understand that many times keeping the Marital Home has more to do with emotions and the children, I recommend that the decision making process include the financial impact  this transaction could have on your future financial security.

2. Relying on Financial Affidavits (Maryland Long-form Financial Statements) for settlement decisions

long_form_financial_statement_pg_1Most states (including Maryland) require divorcing spouses to complete Financial Affidavits as part of the litigation process. In Maryland, the Long-form financial statement is used by most attorneys (and some mediators) to gather the initial financial information needed to have initial settlement negotiations inside or outside of the courtroom. Relying solely on the information "reported" on these forms to finalize your divorce can lead to irreparable financial harm.

Skilled financial divorce advisors prepare and use the Affidavits quite differently than attorneys. They consider tax ramifications, possibilities of hidden or underreported income, and the financial realities of budgets. They refine the numbers and use them as a tool to help you not only settle, but to realistically plan for your future. It can make the difference between settling, and "settling well."

3. Not looking at your financial status post-divorce

Colored_NW_Slide_Lightened-resized-600Most divorcing individuals cannot see past the palm of their hand when they're in the process of separating. It's a day-to-day survival that can last months to years. So at this time, it's critical to examine what your financial situation will look like after an agreement is reached. In Collaborative Divorce, we refer to this process as scenario planning. Once a few settlement options are recognized as being viable for both parties, the Financial Neutral prepares financial projections for both spouses for one, three, five year, or more periods. The analyses can answer these questions and more:

  • Will I be financially ok after the divorce?
  • When will I be able to retire?
  • Will we be able to afford college education for our children?
  • What if......... 

The difference, you're not negotiating "in the blind" and concentrating just on the settlement. You are using this as an opportunity to get your ducks in a row and plan for your future financial security.

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4. Ignoring tax factors

tax_pie-resized-600Although there are no taxes on property transfers incident to a divorce, income taxes affect most post-divorce financial issues including the sale of the one-time family home, alimony, retirement plan withdrawals, basis of property received, and professional fees incurred to obtain the divorce. More taxes means less money for the spouses and their family moving forward! Many times,the cost to complete these "what if" scenarios will become an investment that yields a far greater gain then that of the stock market or real estate:

5. Not covering all bases in the financial settlement

contract_being_magnified-resized-600You've heard the sports saying, "it's not over till it's over." Well, no matter what was said in court or in private conferences, the verbiage in the Marital Separation and Divorce Agreement  is the proverbial "hammer" when it comes to the logistics of marital property settlement and support. The devil is truly in the details when it comes to the final agreement. Make sure that these "extraneous" issues are addressed, if applicable:

  • If a retirement plan needs to be split, who will pay for the QDRO preparation
  • How will the spouses file if they are not divorced by year end
  • If property with a significant monetary value is to be sold in the future, how will the price be determined, how long will it be listed at the current price before a price adjustment is made, and is there a price that triggers an automatic sale
  • Agreement by the Custodial Parent to complete the applicable IRS form to transfer child dependency to the non-custodial parent
  • Making sure that alimony in no way can be associated with a child life event

Many divorce attorneys have told me that their clients rebuff their idea of bringing in a Financial Divorce Specialist to help with the financial analysis. Their clients say that it's an unnecessary, additional cost or that they have their own Financial Planner. This response is akin to letting your GP Doctor perform brain surgery on you or a family member.

Adding a Divorce CPA or  Certified Divorce Financial Analyst to your divorce team can shorten the time that you are in the process, help you make better long-term decisions, and actually save money or produce gains in the long-term.

It's the difference between just "settling" or planning and  "settling well."

John Faggio is a CPA, CFP®, and Certified Divorce Financial Analyst™. Faggio Financial was established in 2004 to help divorcing individuals make the wisest decisions possible in this life changing event. We believe that this only be done with full disclosure of the financial facts, independent analysis, ongoing advice, and teamwork with other divorce professionals that may be involved in your case.

Email or call John today at 410-988-7333 to set up an initial, flat fee, consultation. This 1.5 hour consult may change the direction of your case and lead to a more favorable settlement.

We welcome comments from individuals currently in the divorce process of other divorce professionals.



 

Tags: divorce settlement, CDFA, MD Long Form, Income Taxes, QDRO, hidden income, Alimony, tax exemptions, Budgets, divorce team

Critical Divorce and Real Estate Issues Can Have Spouses Seeing Red

Posted by John Faggio on Thu, Dec 18, 2014 @ 08:02 AM


The majority of future divorcing couples will undoubtedly own some kind of real estate - a family home, vacation property, rental properties, etc. and the odds are that this property will be most valuable asset that the couple will haggle over. A divorce financial advisor can be of immense help in these situations. In a recent case, a mom's entire financial future was dependent upon the sale of just one of the properties owned by the couple and the advisor's Excel spreadsheet became the linchpin for settement funds. Real estate and divorce can trigger financial issues that must be thoroughly vetted to minimize taxes and assure that neither spouse "sees red" after the settlement.

The Family Home

Family Home and DivorceIf the settlement calls for Use and Possession (U&P) of the family home where one of the spouses is going to remain in the home for an extended period of time, there is no need for an appraisal or other method of value determination. Critical considerations in this arrangement are 1) who will be making the mortgage payment?, 2) will the payment be considered alimony?, 3) if it is alimony, what is deductible?, 4) how will ongoing maintenance be paid for?, and 5) how will the settlement proceeds be divided at settlement. The general tax rule for obtaining the capital gain exclusion of $250,000/$500,000 requires that the owner/seller use the home as his or her principle residence 2 out of the last 5 years prior to the sale. There is a special exemption for divorcing spouses in a U&P situation that allows the out-spouse to secure the exclusion.

Free Download Financial Divorce  Survival Guide

There are two surprises that can surface if the family home is sold. First, the gross proceeds of the sale will be reported to the IRS as being 50/50 to each spouse, no matter how the net proceeds are configured at settlement or thereafter. The adjustment for any variation in a 50/50 split needs to be reflected on the spouse's individual tax returns. Second, if there was an equity buyout prior to the sale, the seller's basis is the original cost (no increase for buyout cost) and the major improvements with the capital gain exclusion being $250,000.

Divorce and Rental Property

TownhouseBefore 2009, rental properties could provide a safe tax haven for couples going through the divorce process. One spouse could move into a former rental, use it as a residence for two years, and then claim the capital gain exclusion available for sales of qualified personal residences. Although use of the house as a rental prior to January 1, 2009 does not enter into the calculation, you must now include the period of time that the house was a rental in calculating the capital gain exclusion. For example, let's say that you had a rental for years 2010-2013 and converted it to your personal residence in 2014. When you sold it in 2016, you would receive 33.34% ($166,667) of the capital gain exclusion as follows: Total years owned and rented since 2009 = 4; total years owned prior to sale, 2010-2015 = 6; 4/6 (2/3) of the years owned were rental years, therefore you would only receive 1/3 of the capital gain exclusion. You could end up paying capital gains tax and ordinary income tax depending upon how much depreciation was claimed prior to the sale (see next section).

Five Critical Factors that Affect  Business Valuations in Divorce

 

"Surprise," Depreciation Recapture

Divorce_and_real_estate_surprisesFor this paragraph, depreciation is used to describe the expensing of property over its useful life, according to IRS regulations.For instance, when you purchase rental property, the building cost (not the land component) must be amortized over 27.5 years. For example, if the total purchase is $150,000 and the allocated cost of land is $30,000, you will be able to list $4,364 as a depreciation expense each full year that you own and operate the property as a rental. So let's say that during the year, you collect $15,000 in rental income and pay out $10,000 in expenses. You would theoretically have $5,000 in your bank account. Your tax return would show net income of $636 of income and the resulting tax would be negligible. Is America great or what!

So after ten years (when your sell) of taking this depreciation totaling $43,640, it is now time to "pay the pauper." Instead of the total gain being taxed at the capital gain tax rate, this depreciation recapture is taxed at 25%. This additional tax bite is of crucial concern to the spouse keeping the property in the divorce settlement as it should be included in the valuation of the property.

Owners of rental properties may have annual losses that cannot be deducted on their tax returns. These losses accumulate, attach themselves to the property that generated the loss, and are deducted when the property is sold.They can represent some serious tax savings to the spouse that keeps the property and cause a very inequitable property division to the other spouse if not considered in the valuation.


As seen above, divorce and real estate can provide either or both spouses significant tax issues and unseen challenges to an equitable property division. Is it worth the cost of an hour consult with a financial divorce specialist to avoid or minimize the impact of these transactions?

John Faggio is a CPA, CFP®, and Certified Divorce Financial Analyst™. Faggio Financial was established in 2004 to help divorcing individuals make the wisest decisions possible in this life changing event. We believe that this only be done with full disclosure of the financial facts, independent analysis, ongoing support, and teamwork with other divorce professionals that may be involved in your case.

For a more positive outcome in your divorce, email or call John Faggio today at 410-988-7333 for an initial, flat-fee consult.  


 

Maryland Divorce Financial Planner Uses Graphics to Settle Cases

Posted by John Faggio on Tue, Oct 21, 2014 @ 08:33 AM

Certified Divorce Financial Analysts™ (CDFA) have a unique and effective  "tool" to help individuals understand the potential financial impact that a settlement offer can have on their future finances. If used properly, introducing charts and graphics into settlement discussions can focus all parties on the bigger picture, separate fact from fiction, and make it easier for each spouse to understand the goals and concerns of the other.

"Now I understand"

          Divorce Financial Planning           Divorce Financial Planning                                                                                         

The two graphs above show how each spouse will fare under different settlement scenarios. For this discussion, seeing the individual numbers are not important; the graphs simply tell the story that under the first scenario, the financially-dependent spouse's net worth will rapidly decline three years after the divorce. That story dramatically changes in the second graph. How can this happen? The Divorce Financial Planner is trained to observe and present the bottom line of settlement offers and develop alternatives that can make the settlement more equitable. These graphs visually answer the following questions:

  1. Will I be financially ok after the divorce?
  2. Will I run out of money?
  3. Will I be able to retire?
  4. What will happen when alimony stops?
  5. Will I have to re-enter the workforce?

Illustrations v. Words

In most divorce cases, there are questions regarding what the total marital property consists of. Couples with long-term marriages may have had inheritances, changed jobs and moved retirement funds, started retirement plans prior to the marriage, or earned pensions pre or post-marriage. The illustration below has been used to help each spouse understand the ownership and earned interest in a pension plan.

Divorce and Pension Plans

For visual learners, this graphic will make much more sense than a reading of the legal statute regarding the division of Marital Property.

Tax Filing Issues

Couples going through the divorce process during this time of the year consistently have the question of how they are going to file their tax return. Since they are still married, they can file Jointly, Married Filing Separate, or possibly the Holy Grail of filing status, Head of Household. Faggio Financial has developed a flow chart that helps individuals understand exactly how they can file.Head of Household rules

 

                   Click here to find out  if you can file as  Head of Household         Free Download Financial Divorce  Survival Guide

 

Faggio Financial LLC is Central Maryland's only exclusive divorce financial planning practice. Every day, all of our work is done exclusively in the divorce arena. We do not "manage money" or offer our services as a stepping stone to an eventual Advisor-Investment relationship.

We help divorcing individuals make well-informed financial decisions and assist divorce professionals through every stage of the divorce process, predominantly providing services in Howard, Baltimore, Anne Arundel, and Montgomery Counties.

John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. He is a trained mediator, and has had extensive experience as the Financial Neutral in Collaborative Divorce cases. Faggio Financial provides comprehensive divorce financial analysis and planning, pension valuation, and forensic services.

Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that can put you on the right path to a positive outcome in your divorce.

 


Tags: Divorce Financial Planning, CDFA, Maryland Property Settlements, Income Taxes, marital property, Divorce settlement agreements, Divorce filing status, CPA divorce specialist

Divorce Mediation with a Financial Divorce Analyst™ is a no-brainer

Posted by John Faggio on Tue, Jun 03, 2014 @ 04:18 PM

Many times, Divorce Mediation can be the most cost-effective, lowest conflict, process of all of the divorce settlement options. Currently, the majority of divorce mediators are either mental health practitioners or attorneys who help couples make decisions regarding the legal, child custody, and financial issues of the divorce settlement.

Certified Divorce Financial Analysts (CDFA™) are trained in the legal, financial, and tax issues of divorce. Some CDFAs have become mediators and/or have extensive experience in serving as the Financial Neutral in Collaborative Divorce cases. Doesn’t it make sense then to include or choose a CDFA to mediate the financial issues of divorce?

Advantage 1 - Knowledge of divorce financial and tax issues

Divorce Financial Analyst RoleWe are living in a world of specialties and specialists. Do you want your General Practitioner family doctor to operate on your spine or brain? Well, the CDFA™ is the specialist in divorce. CDFAs are specially trained in the financial and tax issues of divorce. They may have additional credentials such as a CPA or CFP and they analyze and create solutions much quicker than those who do not have this experience or training. Although they are also trained in the legal issues of divorce, they are not attorneys and cannot provide legal advice; however, an experienced CDFA™, who has also worked in litigated cases, can provide you with the legal outcomes of previous cases and basic family law statutes regarding marital property, child support, and alimony guidelines.

Advantage 2- Saving time and money

divorce costs Divorce mediation can be riddled with time delays and wasted meetings caused by the most common issues of lack of pertinent information, lack of specific knowledge (taxes and finances), fear of making decisions, etc. CDFAs know what financial documents are needed to assess the total financial picture. They can address and resolve tax issues, budgeting challenges, business valuation needs, marital property division, and other financial issues without having to call in another professional. The CDFA™ can summarize the financial decisions and send them to your attorney for review and incorporation into your separation and divorce agreement. All of this produces time efficiency, cost and energy savings.

                 Free Download Financial Divorce  Survival Guide                      Start Controlling  Your Divorce  Costs Now!                                          

Advantage 3 - No Surprises

Divorce uncertainty and adviceDivorce is not just an ending, it is also the beginning of a new life with financial uncertainty. CDFAs can use graphs, charts, and financial projections to show both spouses what their future financial situations will look like under any settlement scenario. If you have questions like "am I going to be ok," or "will I be able to retire," a CDFA™ can provide answers and solutions within the mediation framework.

Advantage 4 - A Comprehensive Agreement

Agreement ReviewWording is critical in settlement agreements, especially in regard to tax filing, QDRO preparation, splitting of investment or retirement accounts, support terms, business interests, and stock options. The CDFA™ can make sure that the spouse's financial decisions are properly articulated in the agreement and that the agreement, by itself, does not contain language that will trigger unwarranted income taxes or an IRS audit.

Co-mediation - A viable option

Team approach and divorceUsing a team approach, co-mediation with a CDFA™ can be a very cost-effective process for divorcing spouses. The primary mediator can control the meetings and address parental issues while the CDFA™ sticks to the tax and financial issues. This approach does not have to lead to increased fees. Many times, the mediator and CDFA™ can adjust their fees so that this collaboration has minimal or no impact on cost to the spouses.

John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. He is a trained mediator, and has had extensive experience as the Financial Neutral in Collaborative Divorce cases. Faggio Financial provides comprehensive divorce financial analysis and planning, pension valuation, and forensic services.

Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that can put you on the right path to a positive outcome in your divorce.

 

 
 

Tags: Divorce Financial Planning, CDFA, divorce negotiations, mediation, marital property, costs of divorce, Budgets, Divorce Mediation

When financial divorce tactics trump sound financial planning

Posted by John Faggio on Fri, May 16, 2014 @ 09:16 AM

There are times when a CDFA’s financial recommendations fly straight in the face of sound financial planning strategies. Since 2008, there have been a few cases where the Divorce Financial Planner has apologized to divorcing spouses, “I know you came to me help you get divorced, but we have to address financial survival first.”

Reviewing the budget

Divorce Financial DecisionsExperience shows that there are monthly expenses such as food, direct housing, transportation, and children's expenses where families cannot make a sizeable dent in monthly needs. I am not saying that these items should not be scrutinized and revised accordingly; however, if one looks beyond the budget and into the paystub, substantial savings can be produced. For instance, the Maryland Long Form Financial Statement (State Affidavit) hides juicy information towards the back of the statement. This is where the monthly net income available for support is shown and where discretionary expenses can be controlled, for instance:

  • 401K Plan contribution - how can you fund retirement and not be able to pay your mortgage?
  • Group term life insurance - in a support situation, this will most likely be needed to protect future payments. Is it the most cost-effective tool at this point? Is the employee over-insured?
  • Contributions for stock options or company stock - is this a discretionary expense (investment) at this time?
  • Can withholdings that generate a large refund be adjusted so that more cash is available during the year?

                                                      Free Download Financial Divorce  Survival Guide

Other changes that "go against the grain"

  • Taking advantage of IRS regulation 72(T)(c)(2) - should you use retirement funds for something other than retirement? In a perfect world no, but divorce is a major bump in the road for many goals.
  • Should the "out-spouse" purchase a new house (and get those mortgage deductions) or rent (to give him/her time to consider their new life options)?
  • Is a 30-year conventional, fully amortizable mortgage the right refinancing solution?

Sound Divorce Financial Planning requires more than just helping a client finalize his or her divorce settlement. It's about listening to their concerns and goals, looking past the settlement (what happens after the papers are signed), and using creative strategies that sometimes buck conventional wisdom.

John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, pension valuation, and forensic services.

John is always looking for cutting-edge divorce settlement strategies to help attorneys and/or their clients settle cases in a cost-effective manner. Talk to John for hot tips he received at the April National AICPA/AAML Divorce Conference.

Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that can put you on the right path to a positive outcome in your divorce.

Tags: Divorce Financial Statements, Divorce Financial Planning, CDFA, Retirement Funds, Retirement Early Withdrawal, MD Long Form

Divorce and Income Taxes - How to minimize taxes and avoid pitfalls

Posted by John Faggio on Mon, Mar 31, 2014 @ 09:56 PM

Divorce and income taxes - many times, these two issues become so intertwined that they become the "garden hose" of the negotiations, preventing settlement and paying for your attorney's children's education. If you were physically separated or divorced in 2013, there are several critical tax issues that you will need to address when filing your return in the next three weeks. These divorce tips will help minimize taxes or at the very least, enable you to adhere to the Internal Revenue Service Regulations for divorced or separated spouses.

Determining your filing status and how you will file your 2013 tax return is one of the most critical decisions that must be made. Below are the IRS rules for determination of that status. If you:

  • Have lived apart for the last six months of the calendar year, you may qualify for Head of Household (HH) status; you could alternatively file as Married Filing Separate (MFS), or continue to file jointly
  • Were divorced (as opposed to legally separated) by 12/31, you can file Single or HH (if you qualify)

Filing Status and DivorceWith the tax filing deadline being April 15th, this decision on how to file can be critical if you are still in the negotiation stage. If you have been a stay-at-home Mom and your husband files your tax return electronically, your right to file as you want and possibly your only negotiating leverage will be taken away from you in one keystroke!

 Electronic Filing of your tax return does not require the signatures of both spouses. All that is required is the Personal Identification Number (PIN) of each spouse that was provided when you first filed electronically. So if your spouse needs for you to file jointly (to save taxes), your opportunity to negotiate this point is lost. You will also be liable for any additional tax, interest, and penalty that may be assessed by the IRS in the future.

Hopefully, you had the advice of a CPA Divorce Specialist or CDFA™ prior to the preparation of the Separation and Divorce Agreement. In the absence of a formal agreement, if you are filing separate returns, you must agree on who will be taking the tax exemptions for the children or risk the IRS matching returns and triggering an audit or interest or penalties.

Which parent takes the dependency exemption Divorce and tax exemptionsshould be 100% driven by the tax benefits of doing so. The greater a spouse's Adjusted Gross Income (AGI) exceeds $150,000, the less tax benefit the spouse receives from claiming a child. You do not want to "leave money on the table" and pay more together than is required. On the other hand, physical custody sometimes controls who receives the tax benefits associated with a child. This includes the Child and Dependent Care Credit and HH filing status. Education Credits and the tuition expense deduction are controlled by who claims the dependent exemption but the Education Credits are limited by the parent's AGI. Any one of these credits or deductions can result in substantial tax benefits.

                                               The Ten Biggest  Mistakes Women  Make in Divorce

What about mortgage and interest deductions?

Generally, if spouses file separately, then each is eligible to deduct the mortgage interest and taxes they actually paid. Absent an agreement stipulating otherwise, the source of the funds used to pay the mortgage dictates who is entitled to the deduction. Payments from a joint account are presumed to be made by each spouse, 50/50; payments from a spouse’s separate account are presumed to have been made by that spouse.

What about Use and Possession? Suppose Mom, with two children, is staying in the jointly-owned home and Dad is required to make the mortgage payments?

Divorce and Income TaxesIRS regulations permit the personal use by any family member to inure to another family member when determining whether the house qualifies as a residence. In this situation, since the spouse’s children live in the house, Dad would be entitled to the interest and tax deduction. If there were no children, Dad could not deduct those expenses.

 

Alternatively, if Dad made the mortgage payment directly and the agreement identifies this payment as alimony, Dad could claim half the mortgage payment as deductible alimony and take a deduction for one-half of the interest and taxes.

What about payments made after the divorce? Where there’s a transfer of interest in the family home and the nonresident spouse is required to make payments associated with the home, the paying spouse may be able to deduct the payments as alimony. This is where divorce financial planning is a must. The deductibility requirements for alimony must be met and the resident spouse has taxable income. This income, however, can be offset by the itemized deductions for mortgage interest and taxes.

Alimony

Alimony payments are deductible by the payor and taxable to the payee as long as the payments meet the IRS criteria. A problem arises where alimony is inadvertently or intentionally transformed into deferred property settlement proceeds.

How to pay alimonyOccasionally when the payer of alimony gets wind of tax benefits of alimony, he or she may want to "front-load" the payments, i.e. pay a significant amount in the first year or two. What this amounts to is converting a tax-free property transfer into tax deductible payment by the payor of the alimony.

The IRS wised up to this years ago and enacted rules to prevent excess front loading of alimony payments. Alimony payments that decrease or stop during the first three years may be subject to the recapture rule. If there is no decrease in alimony in excess of $15,000 in year two or year three following the year of divorce, the recapture rule will not apply.

So what happens if there is recapture? In the third year the amount to be recaptured is added back (taxed) to the payer's income and subtracted (deducted) from the payee's income.

Click me

In addition to the $15,000 limitation, there are other exceptions to the rule:

  1. If either spouse dies, or if the spouse entitled to the alimony payments remarries prior to the end of the third post-separation year
  2. The amount of payments fluctuates for reasons beyond control of the payer (e.g. payer pays a fixed percentage of income)
  3. The payments are temporary support payments (prior to filing for divorce)

The key to avoiding this dilemma is proper pre-divorce planning and having a CDFA™ run the calculation prior to signing a settlement agreement.

John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, pension valuation, and forensic services.

Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that can put you on the right path to a positive outcome in your divorce.

Tags: tax exemptions

Divorce Financial Planning is Critical to Federal Employees and Their Spouses

Posted by John Faggio on Wed, Feb 19, 2014 @ 04:05 PM

Divorce Financial Planning is a must for most Federal Employees going through the divorce process. Faced with similar divorce financial and tax issues that others experience, these employees have multiple employee benefits that require special research, analysis, and timely execution of divorce-related documents.

Health and Life Insurance

Federal Employee Health InsuranceContinuing or needing to apply for FEHBP coverage can be an essential need of the Government Employee spouse.

The Fed’s Temporary Continuation of Coverage (TCC) is similar to that of COBRA in the Private Sector and provides benefits to a former spouse up to 36 months after the divorce. The former spouse must pay both the employee’s and government’s share of the Plan’s premium plus an administrative charge of 2% of the total premium.

There is also a Spouse Equity provision that enables a former spouse to maintain their coverage beyond the 36-month window if he or she meets certain criteria.  This is extremely important for those who may have insurability or other issues that would make coverage unlikely or impractical under the circumstances. The former spouse must apply within 60 days after the final divorce with a written notice that he or she wants to continue FEHBP coverage under the spouse equity provision. He or she may also elect to enroll for self-only coverage, or the Government-employed spouse can elect family coverage for qualifying family members. The cost of coverage is the same as under TCC without the 2% administration charge.

 Under Federal Employees Group Life Insurance (FEGLI), a Federal current or former employee, or annuitant may assign life insurance to a former spouse. The assignment would guarantee ongoing financial protection for the former spouse and/or children with confidence that no changes could be made to the policy by the employee/annuitant former spouse.

 Long-term Care Insurance

Federal employees have access to a very good long term care program and coverage is available to the employee and spouse. Since the policy is portable, i.e. it would remain in force for the former spouse, spouses should consider the purchase of this insurance prior to the divorce. This would provide the former spouse with coverage at a lower premium that he or she could obtain in the private sector.

  Free Download Financial Divorce  Survival Guide                  Whitepaper -  How to Protect Your  Federal Pension  in Divorce 

CSRS/FERS Pension and TSP

Divorce and retirementThe Federal Employee's retirement plans are oft times the most valuable assets that are contested for in the divorce process. The CSRS and FERS programs are Defined Benefit Plans (DFP) and the TSP is a Defined Contribution Plan (DCP). DFP do not have any stated present day value and participants receive only an annual Statement of Benefits from their employer that shows projected monthly benefits at different retirement ages. The value of DCPs are determined daily and are available on line or through monthly or quarterly statements. Any portion of the retirement plans that were earned from the date of marriage to the date of divorce (or other cut-off date) is considered Marital Property and subject to division by the courts. Most importantly, no matter what the settlement agreement says, both of these plans can only be divided by a Court Order, which is in the form mandated by OPM and the TSP.

Details on how to protect your federal pension in divorce can be found in our Whitepaper. The most important issues that surround the retirement plans and where Federal Employees need guidance on are:

  • Determination of the values of both plans
  • The necessity of a formal pension plan
  • Which method of splitting pensions is right for you, Offset or "If, As, When?"
  • How to obtain an "apples to apples" trade for a pension
  • Does it make financial sense to give up the right to a pension plan for another asset?
  • When should and who should complete the Court Order?
  • What is the cost of survivor benefits and who should bear those costs?

Divorce and Rental Properties

Divorce and Capital Many of my Federal Employee clients have diversified their investments over the years to rental properties. Prior to 2009, it was commonplace to take advantage of the capital gains exclusion for homes by having either spouse move into the rental for two years thereby transforming the rental into home. The $250,000/$500,000 exclusion was then available on both personal residences when later sold. Now the exclusion is prorated between rental use and personal residence use after January 1, 2009. For example, let's say that John had a rental property in use from January 1, 2009 to December 31, 2013. He moves into the rental on January 1, 2014 and sells the property on January 1, 2016. John has owned the property for seven years. It has been his personal residence for two of those years. His capital gain exclusion has now been decreased from $250,000 to $71,428 (2/7 times $250,000). This change in the law will produce a tax surprise for those who have not been properly advised.

Most times, divorce creates significant financial issues for both spouses and legal counsel may not be enough. Consulting with or bringing a Certified Divorce Financial Analyst (CDFA™) on board with your divorce team can produce savings and/or prevent financial disaster in the long term.

John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, pension valuation, and forensic services.

Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that can put you on the right path to a positive outcome in your divorce.

 

 

                                                           



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Tags: Federal Employee Benefits, Pensions, TSP, Federal Employees, FEHB, CSRS, FERS

Five Critical Divorce Financial Planning Tips for 2014

Posted by John Faggio on Thu, Jan 09, 2014 @ 12:10 PM

These Divorce Financial Planning Tips are for those starting their journey in what's been acclaimed as "divorce month" in many publications. No matter what month you begin the process, if your financial future is at stake, engaging the services of a CPA Divorce Specialist or Certified Divorce Financial Analyst (CDFA™) will be crucial for you to avoid crucial mistakes in this life-changing event.

Planning/budgeting for Obamacare Costs

Obamacare and divorceThe Affordable Care Act (ACA) has made budgeting for medical costs and insurance a crucial step in the determination of the amount and term of alimony needed. Historically, spouses reviewed their historical out-of-pocket costs and premiums incurred in the years prior to the divorce decision. They would also consider the cost of COBRA coverage as a baseline for projected insurance costs. Although Obamacare has somewhat removed the reliance on COBRA, the total projected costs will be significantly higher with individual policies. Ex-spouses needing their own policy should research and apply for coverage to adequately provide for the annual cost of insurance and out-of-pocket costs.

Actual tax projections v. guesstimates

Taxes and divorce

There were significant changes in the tax law beginning in 2013. Taxes for individuals making over $200,000 or $400,000 could increase dramatically due to increases in ordinary tax rates, capital gain and dividend income rates, additional Medicare Tax on earned income, and the Medicare Tax on Investment Income. Long gone are the days where you could make an educated guess and predict with some accuracy what the tax effect would be assuming some percentage of income. Actual tax projections should be completed along with "what if" scenarios to provide you with a plan that you can reasonably count upon.

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Determining how you will file for 2013

                                                                                                                                                                Divorce and tax filing statusWith the tax filing deadline being April 15th, why is this decision so critical at this stage of the process? If you have been a stay-at-home Mom and your husband files your tax return electronically, your right to file as you want and possibly your only negotiating leverage could be taken away from you in one keystroke! The tax filing rules are: 1) If you have lived apart for the last six months of the calendar year, you may qualify for Head of Household (HH) status, file as Married Filing Separate (MFS), or continue to file jointly, and 2) If you were legally divorced by 12/31, you can file Single or HH (if you qualify).

Manage and focus

Most successful clients do not lose control of the process. When a professional team member agrees to take an action (meeting, phone call, etc.), these clients will follow up shortly after the due date to make sure that the process is moving along.

Experience shows that when spouses focus on the future (and not dwell on the past), the decision process and settlement moves rapidly. These clients survive the process and tend to thrive in their own financial future. Divorce is one of the most difficult situations that anyone can face. Being well-informed, rational, focused, and involved will help you overcome unique challenges in the divorce process and move you into the future with your best foot forward.

                                                  Whitepaper -  Alimony Determination  in Maryland

Research all options

Costs of Divorce

I have never seen a couple have more assets at the end of the divorce than they had at the beginning. In many cases, especially where one or the other spouse needs "to win," family assets are wasted.

Explore all of the divorce process options and learn about the financial and emotional cost/benefit of each.  Read a book, attend a class, or research the Web for professional, fact-based articles. Collaborative Practice is a revolutionary process that uses a non-adversarial approach to divorce and puts you in control of the process. Maybe Mediation is right for you. There’s also Arbitration. Court should be your last resort.

 

Prepare a file for each professional

Legal and financial divorce professionals require nearly identical pieces of financial information to begin a case. This information is necessary even if you stay out of the courtroom. Save yourself time, energy, and money by making copies of these documents and creating files for you, your attorney, the CDFA™, and your mediator, if applicable.

  • Copies of individual tax returns, last three years (including W-2s)

  • Copies of Business tax returns, last three years, if applicable (you or your spouse are business owners)

  • Copies of year-end business financial statements, if applicable

  • Copy of most recent mortgage refinancing, if applicable

  • Any real estate appraisals or business valuations, if applicable

  • 2 recent and consecutive pay stubs for each spouse

  • Recent mortgage statements that show balance owned, monthly payment, and interest rate

  • Copies of credit card statements received with current balances

  • Kelly Blue Book values for all vehicles owned

  • Statements for any other loans that show balance owned, monthly payment, and interest rate

  • Recent statements for all checking, savings, investment, or retirement accounts (personal and business)

  • Information for life insurance owned, type of coverage, annual premiums and cash value if any (annual cash value reports, if applicable)

  • If pensions are involved, correspondence or online statements that show projected monthly benefits at retirement, or a recent benefit pay stub if in payout startus

John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, and forensic services. Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that put you on the right path to a positive outcome.

Tags: Divorce filing status

One of my favorite tasks-Finding Hidden Income or Assets in Divorce

Posted by John Faggio on Wed, Nov 06, 2013 @ 03:12 PM

Finding hidden income or assets in divorce is one of the most challenging yet rewarding service that a CDFA™ or CPA can provide. It can alternatively be frustrating and expensive for the client, providing little or no answers.

In any forensic case, I always alert my clients to the probability of little or no positive findings, "I can go down any "rat hole" that you want and find nothing." The objective is to quantify the financial risk and reward and curtail the client-spouse's continuing losses. Each engagement is different; however, I consider the following tasks to be crucial to the investigation:

Tax returns and divorceReviewing at least the last three year's personal tax returns (including W2s) can provide a wealth of information and/or Discovery, or Interrogatory questions prepared for the divorce attorney. An experienced CPA can estimate the annual, after-tax cash flow to the family in a relatively short period of time. This leads to a comparison of the cash flow to Affidavits or budgets prepared by the spouses to corroborate lifestyle expenses.

Other areas of "interest" include a review of interest and dividends, retirement plan distributions, Schedule E rental and/ investment income and losses, and itemized deductions. Investigation of these areas can provide indications of dissipated assets, valuation issues, more red flags, or understated income.

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business analysis small for 11 2013blog resized 600Financial statements and/or business tax returns, including Schedule C for an unincorporated business are reviewed for unusual, non-economic fluctuations in income, elimination or adjustments for noncash expenses, unreasonable compensation, personal expense deductions, unnecessary expenses, officer loans, fraudulent employees, etc. If the employee-spouse is an officer or highly compensated individual for a non-public or public large company, employment contracts are needed to ascertain additional benefits that are not reported on the W2.

 

Divorce and refinancingHas the home been refinanced or has investment property been purchased? Loan or mortgage applications usually present the best financial condition of the borrowers. Assets, income, and debts can be corroborated or identified in these documents. Most times the problem is locating the information, which may have to be subpoenaed from the Title Company or financial institutions.

 

Forensic interview divorceInterviewing the client and possibly his or her spouse and listening is one of the most important steps in the financial review. In a business situation, the nonbusiness spouse should have some knowledge of the business. They may know the names of major customers or those with other financial or business relationships. Discussions can also lend insight as to the family's financial lifestyle, property valuations, and unreported sources of income.

John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, and forensic services. Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that you need.

 

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Tags: Income Taxes, marital property, support, hidden assets, hidden income, forensic services