Men and women alike can get caught up in the emotional issues of divorce and each have their own financial issues in the process.The addition of a Certified Divorce Financial Analyst™ to the divorce team can help either or both understand their issues and move forward toward an equitable property divorce settlement.
Depending upon her ability to generate income, the most pressing issue for women is their own future financial security. Mix in the elements of perceived fairness, anger, fear, and input from friends and family, and you have the makings of a divorce rubix cube.
When I taught the class “What Women Need to Know about Divorce,” I reviewed in great depth these areas that I beleive to be the most crucial to women who find themselves at the end of a long-term (20 plus years) marriage (assumption – at least a family of three where Mom is financially dependent spouse).
Mortgage payment v. alimony
There are a number of issues to consider in this decision. Will the payment be considered taxable income (alimony) to Mom? If so, Mom will most likely be able to be able to claim Head of Household (HH) filing status, if the other criteria are met. If Mom’s other earned income is low, would it be better for Dad to continue to make the mortgage payments thereby making Mom eligible for the Earned Income Credit? Uncle Sam would then be sharing the family support burden with refundable credits; however, Mom may not be eligible for HH filing status. A few hours of dependable divorce tax planning will help you make the best choice in this situation.
Tax Exemptions
Which parent takes the dependency exemption should be 100% driven by the tax benefits of doing so. The greater a spouse’s Adjusted Gross Income (AGI) income 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 trigger substantial tax benefits, which could lead to a change in support structure.
Shared v. Traded Pension
Pensions are considered Marital Property and must be addressed in the Maryland Separation and Divorce Agreement. One method to divide pensions is the ” as, if, and when” approach. Essentially, if and when the employee-spouse retires, the ex-spouse is paid his or her marital share of the pension on a monthly basis.
The alternative is to value the pension in today’s dollars, calculate the respective spouse’s share of that value, and “offset” the share given with other marital assets. A frequent example that I see of this is where Federal Employees keep their pension and give their TSP to their ex-spouse. To use this approach, there must also be additional marital assets (home equity, other retirement plans, etc.) to offset the value of the pension.
The problem lies in the fact that spouses do not know what the present day value of their pension is. Defined Contribution Plans, e.g. 401K, TSP, 403B, etc., provide employees with quarterly statements that show what the values are at that time. For pensions, most times the only information available to employee-spouses is what their future benefits would be in retirement.
Frequently, spouses who both have pension plans mistakenly just compare their respective future benefits and base their decision on those alone. This, however, is where real Divorce Financial Planning Services is a must!
Business Valuations
Under Maryland divorce laws, business ownership (100% or partial) is considered Marital Property if the ownership was started or the business has increased in value during the marriage. To further complicate matters, only the Enterprise Value of the business is considered the Marital Share. Personal Goodwill belongs to the owner of the business.
Business valuations are can be very expensive so a complete cost/benefit analysis to determine if a valuation would be cost effective is crucial to the decision-making process.
Also you should always ask questions to the lowest bidder as to why their costs are substantially lower. If you believe that your case could go to litigation, you will need an valuation and a valuation expert that can pass the scrutiny of the courts.
Forensic Review and Analysis
While not necessary in most divorces, review and analysis of business tax returns and tracing of assets can be a great cost-effective investment in the divorce process. Small businesses can be a treasure trove of deferred compensation, personal expenses transmuted into business expenses, unreported income, income disguised as loans, etc.Tracing the purchase or gift values of property, which has had significant growth during the marriage and which may have a Separate Value component can mean thousands of dollars to each spouse.
Common analyses include after-tax cash flow of individual tax returns, “true” cash flow of business tax returns, Sub-S cash flow available for support, tracing of pre-marriage and post-marriage property and associated growth, and personal v. business tax deductions.
John Faggio is a CPA, CFP, and a Certified Divorce Financial Analyst™. He uses sophisticated tax and financial planning software to help divorcing individuals make well informed, rational decisions concerning their divorce agreements. Email or call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to review your divorce agreement or proposal.
