Archive for March, 2017

Not Everything Is What You Think It Is

While support is determined for a couple, whether by themselves or a court, the property must also be taken into consideration. This includes things that are owned, as well as debts that are owed.

First, looking at assets—the things owned—always take into consideration the tax aspects of property. The value of a stock is the net value after taxes are paid, or capital losses are realized. For example, if there is cash amount of $100,000 and stock of $100,000, which is worth more? That depends. If the stock was purchased for $75,000, then there is a gain of $25,000 and tax will be due on that amount if it is sold.

If the tax rate of the gain is 25% for state and federal taxes, that is a cost of $6,250 plus any commission charges. Suddenly the $100,000 in stocks is worth a bit less than $93,750.

But what if the stock was purchased for $125,000 and is now worth $100,000? Odd as it sounds, the stock may be worth more. If the stock is sold and the seller gets $100,000 in cash, they also have a capital loss of $25,000 that they can use to offset taxes going forward. That also has an economic benefit.

House and money on scales

Every asset has a tax consideration to it, and courts do not always acknowledge it. Each asset should be valued based on its economic worth and the tax considerations for each side of the negotiation. Looking at these elements from each side may result in different values. If one person is at a lower income level, that capital gain will be taxed at a lower rate. Further, the loss from a capital loss will be worth less to the low-income person.

This is a part of thinking financially as well as legally. It is too easy to get an asset and end up with less than you thought. This also goes for retirement accounts, and how easy it is to get a settlement that includes a pension if the recipient needs cash now. If they are careful, they will first understand the use of a QDRO (Qualified Domestic Relations Order) that can allow for a one-time qualified pension plan distribution (not an IRA) without paying a 10% early withdrawal penalty. But once again, what is the tax that must be paid to get at those assets? That tax reduces the value of the plan overall.

On the reverse side of assets are the debts—those things that you owe. When couples split, debt is often one of many reasons for the marriage ending. Ideally, debts are divided like assets when both sides are signed on to an obligation. The problem is that both remain equally responsible to the lender regardless of any agreement for each person to pay their own half. Even with a court order requiring one person the take responsibility for the debt, if that person defaults, the lender is coming after the other person as someone else that is responsible for paying.

The best way to handle this is to open new accounts and transfer the debt from any joint account to the new separate account. To the extent that it is possible, getting names off auto loans and leases is advisable, as well. Houses are larger and more complex, so it is advisable that if one person is keeping the home, the lender should be contacted to review options for getting the non-resident spouse off the mortgage. Typically, this is accomplished through a refinance of the residence.

One particular case involved IRS debts, which are common in divorce. However, this was an unusually large amount that was due. The problem with IRS debt is that both sides are obligated, and there is no recourse to have the other person pay. If the return was filed as joint, the filers are “jointly and severally liable” for the tax due. This means that the government can go after any person for the entire amount due. If the court ordered each side to pay their separate amounts due, that only leaves the paying party pursuing the other side for reimbursement of their share of the liability.

However, there may be a couple of options to avoid this. Each of these depends on the facts and circumstances of the situation as to whether they apply.

First, the return can be amended by filing separately. This will result in a higher amount of tax due overall, but it can make each side liable for their portion only. Second, it is possible that one person qualifies for tax relief. These options include Innocent Spouse, Separation of Liability or Equitable Relief.

The “Innocent Spouse” option requires that one person demonstrate that the income reported and deductions were incorrect, and beyond that person’s ability to have known or discovered the error. In many cases this is difficult to prove. The IRS and the courts tend to assume that the spouse claiming innocence would have knowledge or suspicion about the income based on a lifestyle being enjoyed.

“Separation of Liability” is a request that the taxes be allocated based on income earned and deductions allocated to each person. This form of relief is also based on items not being reported correctly. However, instead of asking for total relief from the taxes due, the person petitioning for relief is requesting that only the tax allocated to that person is the amount for which they are held responsible.

“Equitable Relief” may apply when you do not qualify for innocent spouse relief or separation of liability relief.

This area of tax law is a specialized form of practice that is beyond the scope of this discussion. However, it is important to be aware that there are possible options to handle tax issues.

Also, something that is often forgotten is to make sure the insurance carriers for auto, homeowners, and other similar property coverage are notified of the separation. Otherwise the owner of the asset – a car – may not get the check issued by the insurer if the other spouse is named on the insurance contract.

 

Armand and Robbin D’Alo

How Do Women Cope with Finances in Divorce?

In 2012, the U.S. Government Accounting Office issued the results of a study that looked at how women fared as they approached retirement. The study showed that women were more likely to be financially disadvantaged than their male counterparts.

“For women approaching or in retirement, becoming divorced, widowed or unemployed had detrimental effects on their income security. Moreover, divorce and widowhood had more pronounced effects for women than for men. For example, women’s household income, on average, fell by 41 percent with divorce, almost twice the size of the decline that men experienced. For widowhood, women’s household income fell by 37 percent—while men’s declined by only 22 percent. Unemployment also had a detrimental effect on income security, though the effects were similar for women and men; household assets and income fell by 7 to 9 percent.”

Woman

Factors that add to the reasons women do not do as well as men include:

• Time out of the workforce reducing the level of marketable skills
• Incomplete education
• Cost in terms of time to attend to the needs of children
• Costs of running a household without a spouse, including day care
• Periods of unemployment
• Helping elderly parents in need of assistance

This is not intended to be a complete listing, but it is a general representation of why women tend to do worse than men after divorce.

To be better prepared, understanding the difference between the “legal” and the “financial” may lead a woman (or man) down different paths. For example, while a mother may receive large support payments, if she does not have the resources and support structure to help her overcome at least the first four impacting issues noted above, then she will never escape the trap of lower income. The closer she gets to those retirement years, the fewer options she will be able to avail herself of. This impact of being disadvantaged in divorce get worse with proximity to retirement. That was the core finding of the GAO study noted above.

 

Armand and Robbin D’Alo