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
The 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
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.
Determining how you will file for 2013
With 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:
- 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
- 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.
Research all options
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
John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, and forensic services. Email or 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.