Archive for the ‘Finances’ Category

How New Tax Law May Increase A Divorce Settlement

In mediation and other methods of non-litigated settlement processes, the goal is not for the mediator or neutral to remain solely as a referee.  This person may also offer information to the couple about their process.  This may be through providing legal or other information and what-if brainstorming sessions.  The idea is to generate awareness of issues that impact what the couple is doing and how to come to agreement creatively.

One example is with the passage of the 2017 tax reform bill.  The tax changes may make support agreements tougher to reach.  In the past, the government participated in the process by offering one side a tax deduction, and the other side claimed the income.  In the real world, this provided tax savings for the paying spouse.  Income was shifted from a higher tax bracket to a lower one.  That tax savings increased the income options of the lower income spouse while providing a tax break to the higher income person.

The New Tax Rules

That is gone after December 31, 2018.  For those racing for the “exit” before that date, the option of filing a legal separation with the court and entering into a spousal support agreement may preserve the deduction for when the divorce is final in 2019.  But even that option, if successful, will run out on December 31 of 2018.

But there is another part of the code that impacts business owners going through a divorce.  This may be especially true for those with a spouse-partner in the business.

Under revenue code section 199-A a taxpayer may be eligible for a 20% reduction in income based on the profits of the business.  This article is not going to explain the code section or how it may apply specifically.  We do want to bring up the fact that taxes and tax savings are financial assets to be considered in negotiations.

For example, under the new rules, if a spouse owns a business with $100,000 of eligible profit, there may be a $20,000 deduction against all other income on the tax return.  That deduction could result in significant tax savings and a component for the support negotiations.

In the negotiation, if support is $48,000 annually, with the elimination of alimony deductions, that would cost the paying spouse $25,846 in taxes ($73,846 X 35% = $25,846).  That is an expensive payment under the new rules.

With 199-A that calculation may change.  The taxable income may now be reduced by the 199-A deduction.  The idea under the new tax law is to reduce the tax impact on business owners.  The business tax rate drops from the higher personal rate to one that is comparable with the new lower corporate tax rates.  This is done through a deduction.

Under a simple calculation, assuming that the overall effective rate is 21%, the amount needed to pay the same support payment is now $60,760 ($60,760 X 21% = $12,760 in taxes).  This is about a $13,000 tax savings.

The net result in both cases is a payment of $48,000 in support.  With this new 199-A deduction, for some business owners, it is a way to pay less in taxes.  For others, this may be a way to stretch dollars and provide more in support.

Another side of the code section is the impact of salaries paid.  Those are also part of the calculations.  With a divorce, if the spouse had been involved in the business, depending on the post-marital relationship, options around salary and benefits may be another way of shifting income.  This course of action requires that a salary is justified.

In more contentious situations this may not be possible.  But the financial impact of this option may push some to reach a more peaceful and accommodating arrangement.  With divorce being inevitable and support as a required component, making a couple aware of the tools open to them is one role of a mediator and consulting attorney.

These are only illustrations of a concept.  This is not personal tax advice or a projection of a specific tax consequence.  Each person will need to run these complex illustrations for their situation.  But the concept is clear.  Tax issues matter and have a financial impact on divorce.  Take a closer look through One Last Look™ to review issues as they may impact a specific situation.

Armand D’Alo and Robbin D’Alo

Working Through Financial Stress in Marriage & Divorce

Money: A Path to Trouble or Peace

One of the common reasons cited by couples for divorce is financial stress.  They indicate things like too much debt, not enough income, someone not carrying their financial weight, overload of expectations not being met, and more.  Each one or any combination build towards financial stress in the relationship.

The fact is that financial matters may not be solved in divorce.  They may be compounded.  Instead of one household, there are now two.  The debts are typically an obligation of both people.  Taxes are also going to follow both if the returns were jointly filed.  Houses, when sold, may be used to satisfy debts, but then where do people go to rent?

Looking at housing, if there are children, it may be desirable for them to remain in their current school.  This requires a rental for at least one person to remain in the area.  In addition, there is the need for the other parent to have a place large enough to provide a suitable environment for the children.  The result is a more expensive living situation.

How to Handle Money

In marriage or divorce, the first step is to work through the details.  This starts with a picture of the couple’s current financial situation.  Awareness is a major key to moving forward.  Both sides need to understand what is available and how they arrived at that point.  If people are not aware of how they got here, the possibility of correcting the situation is diminished.  This is true regardless of their relationship choices.

It is interesting that in divorce, when one side files, there is a restraining order placed on the major financial accounts and assets of the marriage.  Changes in beneficiaries, withdrawals of significant amounts of money, and termination of insurance contracts are barred.  The only way a change occurs is with mutual consent.  The one exception is to cover the obligations of the community.  But even that needs to be disclosed and monitored in proximity to the expense.

This is actually a good pattern for couples to learn, married or divorced – sharing information and making decisions together.

War and the Choice for Financial Ruin

The use of legal counsel is always advisable in divorce.  The issue does not have to do with obtaining legal counsel.  The problems arise with how the attorney is used.

When couples refuse to cooperate, hiring an attorney may be an expression of frustration and a method of taking back perceived power and control.  When the divorce turns to a litigated fight, both sides retain attorneys.  This leads to a typical retainer ranging from $3,000 to $10,000 each.  If the divorce is perceived to be more complex, that retainer will most likely be much larger.

Money roll and judges hammer on wooden tableIn litigated situations, it becomes a legal version of “telephone.”  Attorney A talks with spouse A.  Attorney A will then contact attorney B (if attorney B had not already contacted attorney A).  Attorney B talks with spouse B.  They develop a response.  Attorney B responds to attorney A who then confers with spouse A.

At this level of conflict, couples are encouraged to avoid speaking with each other.  The exceptions are in the required situations like an exchanging of the children.  Direct communication is cut – except through legal counsel.

At $350 to $450 an hour, plus staff fees and out-of-pocket costs, the legal bills add up quickly.  It does not take long before the retainer is drained, and a new retainer is called for.

From our experience, the typical litigated divorce can easily run up $30,000 to $50,000 in legal fees.  If there are contested issues around children and custody, the cost increases exponentially.  The court will require evaluations and possibly a court-appointed attorney for the children.  All those funds are lost from the estate – money that most couples cannot afford spending.

Peaceful Path Forward

The alternative is to plan out a path forward.  In marriage, this is reached by having a budget both agree to follow and a simple “policy” of two signatures required for every expense.  The two-signature policy fosters mutual agreement and ongoing financial awareness.

The practical approach for couples in any situation includes a monthly review of fixed expenses.  These are the largest bills which include the mortgage, car payment (if there is one), credit cards, utilities and any other costs to the family.  This will also include a review of any credit cards, their usage, the outstanding balances, and the payments.

The next part is the periodic monthly expenses.  There are “forgotten” periodic expenses like car insurance and homeowner coverage.  There are “surprise” expenses like medical deductibles, car, and house repairs.  Families also take vacations, have birthdays, anniversaries, and other expenses that “happen,” but may not be planned for.

Putting together a budget for these expenses allows couples to set aside funds each month.  These funds are moved into the “untouchable” savings account for use when needed.

What is odd to couples in divorce, is that all this information needs to be planned out and disclosed in their financial reports.  The very thing that drove the couple apart is the issue where they need to cooperate most.  Then at the end, it requires two signatures to sign off on the financial disclosures – including the income and expense reports.

These reports are required by courts.  But when litigating attorneys are involved, this can become an expensive process with each side issuing requests for financial information.  If it is not forthcoming, the request turns into a subpoena – the legal demand for information.  If the material is suspected to be incorrect, this escalates to hiring experts to do forensic evaluations – more costs.

Our observations through the years are that education is one key to successful negotiations.  In marriage or divorce it is important for both spouses to have a full understanding of their mutual financial world.  This helps both sides to know what is on the table and whether an offer is acceptable or not.

The Lessons

In marriage or divorce, cooperation is essential to economize and move forward.  If the marriage is so far gone that a couple will not work on the relationship, then it is best to cut those losses, set up an independent financial program and take care of the business of divorce.  But do not enter this with the illusion that life will go on as it was in the past.  Cutbacks and sacrifice are needed to make divorce or marriage work.

With divorce, most cases create a mutual agreement by the couple to keep the household running, and the children cared for.  That sounds impossible to some.  In situations when the other person does not cooperate, there are ways to move the process forward.  The court may be used to garnish wages and to seek access to assets independent of the other person’s cooperation.

In California, there are laws under the family code that allow access to assets for support and maintenance of the “marital standard of living.”  This does not mean that the same standard a person was accustomed to will be maintained.  But it does provide methods to seek funding for legal counsel and support payments while the matter is sorted out.

In California, this starts with a court filing asking for temporary support.  If the request for temporary support is refused by the other side, then an assignment of wages is an option.  This process is available when cooperation is absent.

While demands can be issued and a level of support obtained through the courts, this course of action is expensive.  The spouse that is compelled to pay will have their employer involved through a legal garnishment of wages.  The cost to both sides for legal counsel to maneuver this maze leads to more wasted assets.  Working it out before resorting to this measure makes better financial sense.

A Core Question

If couples are headed in the direction of litigation, we have a question for them to consider together.  Is a fight worth the financial and emotional cost?  We also explore the hidden costs when children are involved.  If children are aware of the divorce, they will most likely be aware of their change in circumstance.  They may also be aware of mom or dad not paying for their support.  That is a devastating message to a child.

Closing Comments

Our mission is to educate people about their relationship options, including divorce.  As couples approach a crossroad in their relationship, they may believe divorce is their only path.  The fact is that a divorce is one option among many.  It is one point on a continuum.  We encourage couples to take One Last Look™ before deciding.  Here is a place to explore options based on the couple’s own facts and circumstances.  They can see how the process might play out in the real world of separation and divorce.  Investing about four hours to save thousands in legal fees and heartbreak is worth consideration.

 

Armand D’Alo & Robbin D’Alo

Note:  Links in this article were active as of September 2018.

Money & Marriage: The Hard Conversations

Myth:  Couples with financial conflicts should get a divorce.

Reality:  Conflict is a part of every relationship.  The question as to staying or leaving is how a couple chooses to approach the differences.

The financial conflict conversation is rarely about money.  The true conversation is about what money means.  One description of this mental process is called the Complex Equivalent; a belief and value that are coupled with a behavior making the action a “programmed” response.  Actions with money are an example of this.

Internally the behaviors seem congruent and make perfect sense.  The response from a spouse or other outside observer is the external mirror reflecting the reality of those actions.  At times, what seems internally congruent is externally dysfunctional.

Overcoming these problems requires open communication. 

Most couples do not understand how to communicate around financial issues.  Individuals think that their internal dialogue and perception is the reality that everyone else experiences.  What they do not understand is that in any relationship, the meaning of communication is not in your intended message; it is in the response received from the behavior.  This may be approval, shock, acceptance, grief, fear or much more.

This is evident when we observe couples.  We see poorly worded comments that were received with relief and a positive acknowledgment.  We also see carefully crafted comments that elicited strong, negative responses.  Clearly, the intended message gets lost if the level of trust and acceptance is non-existent.  It becomes difficult or impossible to exchange information when there is a lack of emotional flexibility within the communication.

Per-Marital Behavior

These learned interactions go back to the time when people are dating.  When couples are caught up in the “limerence” of romance, they are not thinking clearly.  It is a bit like grocery shopping without a list while you are hungry.  Without an external objective measure, it is difficult to make an accurate assessment.

When we teach professionals about money and marriage, we talk about these early interactions.  The exploratory pre-marital conversations are important when getting to know each other.  If there is hesitation with transparency, that can be an early indication that something is wrong.

Even if you are married and find yourself in financial conflict, there is a path forward, as long as both sides are willing to be transparent and to make changes that conform to the reality of your financial world.

Eva Rosenberg offers a list of questions people that are dating can use to get to understand each other financially.  This is part of building awareness about how you each view the financial world separately and as partners.

Suggested questions to have in pre-marital conversations. 

By your direct observation, what financial habits are displayed in daily life?  What is the level of financial awareness or is there a tendency to avoid paying attention?

Is a person obsessive, controlling, or pre-occupied with money?

What attitudes do you both have toward money?  Is the behavior or belief system frugal, stingy, wasteful, or balanced?

Is there any gambling? If so, how? Is the gambling online or in casinos? Are bets made with friends?

Are there any outstanding gambling debts (or any other debts)?

How willing are you both to be accountable and to live on a budget?

What big purchases are anticipated in the next few years, and what are the plans to pay them?

Are there any child or spousal support obligations?  Are these obligations met on time?

How are the relationships with any ex and children of another relationship? How will those relationships impact the new life together, both financially and emotionally?

Is there any reason for the finances to be kept separate, at least in the beginning?

We add in a few steps we call the “romantic third date.”  These are items to be looked at if a relationship seems to be getting serious.  This involves asking the tough tax questions before you get married:

Are there outstanding IRS tax liens or unfiled tax returns?

Did the spouse-to-be comingle funds with a prior spouse without properly severing the financial relationships with that prior spouse?

Will the new relationship be impacted by old creditors?

An important early step is to share financial information that you can review independently allowing you to make independent conclusions.  Assuming you are comfortable with this person, you can jointly share your tax and credit information.  You can provide each other with Form 4506T Request for Transcript of Tax Return. This allows you to see the IRS tax information for each person over the last four years.  You can also order the credit reports from all agencies.

You are looking to see if there are tax liens, levies, a poor credit history, or anything else that would raise a flag.

What if your married and in a financial mess?

Assuming you have both been open and honest with each other, there are many financial problems that arise outside your immediate control.  Financial distress can result from a company downsizing, a medical crisis with large bills, or technology replacing the need for a human to fill a position.  When the financial crisis hits in a healthy relationship, the partners pull together.  They put up their best efforts and work to make their lives better.

If trust is destroyed by poor financial behavior, this is most often a terminal issue for the marriage.  At least one partner concludes that anything is better than the current situation.  The pain of separation becomes the more attractive option.

Conflict carries choices.  Conflict can result in growth when two people participate in the resolution or conflict can lead to destruction when people become positional, secretive, and unwilling to work towards a resolution.

Is There Still A Way to Preserve the Alimony Deduction?

What Are The Options?

The first reaction to this question is “No!”  But let’s dig a bit deeper into what options are open to the couple.

Do You Have to Be Divorced by December 31, 2018?

Possibly not.  Under code § 71, alimony and separate maintenance payments are prescribed as being deductible if, “such payment is received by (or on behalf of) a spouse under a divorce or separation instrument.”  It further states that “The term “divorce or separation instrument” means—

(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(B) a written separation agreement, or

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

Based on this part of the code, while there is no precedence for the matter, it appears that a couple need only have a separation agreement in place on December 31, 2018, for their support payments to be deductible.  The interpretation of the tax reform rules appears to indicate that regardless of the repeal of the deduction for alimony paid and corresponding inclusion in income by the recipient (effective for tax years beginning in 2019), that alimony paid under a separation agreement entered into prior to the effective date is generally grandfathered.

If there are modifications, such as the separation becoming a divorce, it is important that the provision is stated in such a way as to be part of the original agreement, incorporating those provisions of support into the final agreement.  If the modification expressly provides that the amendments made by this provision apply to such modifications, it should stand the scrutiny of IRS review.

What About After December 31, 2018?

The tax code provides some options that are not as valuable but still useful tools.  For each of these, check with a tax specialist to verify if it is an option in your situation.

Head of Household:  If there are more that one child in the marriage, it is possible to arrange for joint custody with each parent having primary custody of one child.  You may choose Head of Household filing status if you lived apart from your spouse, meet certain tests, and are considered unmarried on the last day of the year (Code Sec. 2(b); Reg. Sec. 1.2-2(b)).

You can elect Head of Household filing status even if you are not divorced or legally separated.  If you qualify as head of household (rather than as married filing separately), your tax rate may be lower, the earned income credit and certain other credits may be available.

Property Taxes:  When couples divorce, the house is generally the largest asset they hold.  The payment of taxes on that property are still deductible is the combined income, property and sales taxes do not exceed $10,000.  This can be a tax benefit to the higher income taxpayer since the limitation on itemized deductions is no longer a factor.

Interest on Mortgages:  Another deduction may be the interest paid on the property.  It is possible for an interested person, the people on the mortgage, to assume the responsibility for the debt and make the mortgage payments.  This can entitle that paying party to tax the deduction for the mortgage interest.

These are a few options that can help in managing the cash flow burdens for those going through a divorce after December 31, 2018.

For further information, contact us at oaktreemediation.com.  We will be happy to assist you in evaluating your financial options.

 

Armand & Robbin D’Alo

UPDATE – 12-15-2017: Divorce: Alimony Gets a Short Reprieve … Then the Ax

New Information From the Tax Conference Committee

Money roll and judges hammer on wooden tableAccording to the bill coming out of the conference committee, it appears the agreements that predate January 1, 2019 will remain deductible to the paying spouse and treated as income to the recipient spouse.

After December 31, 2018, alimony would no longer be deductible by the payor for new decrees. Payments would be excluded from the recipient’s income.

The consequences:

If divorce is being considered in states like California, people need to push their agreements through.

 

Armand & Robbin D’Alo

Tax Reform: A Business Boom for Family Law Attorneys

Under the House version of tax reform, there is a provision to repeal § 215 – Alimony payments.  That means that the payor will no longer be able to deduct their support payments.  It also means that the recipient will not be taxed on the income.  That sounds great for the recipient!  But the payor is not going to be happy.

Looking at the background, a lot of settlements revolve around the payor spouse being in a higher tax bracket than the recipient.  The net result is that by getting a deduction for the payment, there is a shift of income from the higher bracket to a lower bracket.  This is attractive to the payor since they get to reduce their overall taxable income.  In fact for those in high-tax states, the combined rate of 49% or more means that the payor spouse is making the support payments at a 49% discount.  This also leads couples to negotiate family support, or unallocated support payments, that only increases the tax effect.  This saves even more through tax dollars.

Now, if that adjustment is taken away, those dollars paid will be hard after-tax dollars costing the paying spouse a lot in taxes.  Since taxes were part of the original equation, it is easy to see a flood of petitions to the family courts asking for adjustments in support based on the new math.  The argument will be that the recipient will have a non-taxable flow of income.  Therefore, the payor spouse should be entitled to a discount based on the recipient’s tax bill, had they paid income tax on those funds.  There will be a spread in taxes between the paying spouse and the recipient, and that will be an area of contention and negotiation.

Sadly, the matter tends to move against public policy.  Family courts had an interest in keeping people off welfare and other public support.  This change challenges that notion making it more difficult for families to separate, especially when they are struggling with hard financial conditions.

A Big Cost That Jeopardizes Support Levels

Here is a simple example for illustration.  If the paying spouse is in a 39.6% bracket and the receiving spouse is in the 25% bracket, the net tax savings in the transfer of income is $$8,760.  That is a tax saving of $23,760 for the payor and a $15,000 bill for the recipient.  When that advantage is taken away, not only is the $60,000 transferred, the tax of $23,760 needs to be paid by the paying spouse.  That is a hard cost and total payment of $83,760 from the paying spouse to the recipient (the alimony plus the tax due).

With this much at stake, it is not hard to imagine that a lot of agreements will be altered and petitions will be filed to reduce the amount of support being paid.

Comment:  We wonder if the people behind the scenes that wrote this bill were IRS representatives.  For years they have worked to chisel away at family support (unallocated support) and other forms of transfer payments.  It seems that this bill is targeting those elements precisely with the intent to eliminate all tax aspects of these transfer payments.  The Senate version leaves § 215 untouched.  We will have to wait and see what they do in their committees.

Tax Relief During and After Divorce

One area of negotiations focuses on how to file a tax return during the divorce.  The discussion also focuses on how to handle refunds or tax liabilities on those filed returns.

Refunds are potentially simple.  This is done by allocating the refund to separate bank accounts.  The allocation is based on many factors negotiated by the couple.  The actual allocation is accomplished by filing form 8888, Allocation of Refund, with the tax return.  This directs dollars to the separate accounts, as indicated in the form.

When taxes are due, there may be other issues.  If there is significant lack of trust on the part of one spouse, there may be fear that taxes due will be imposed on an innocent spouse.  Further, if the return is filed as a joint return, both people become responsible for the tax that is due.  A family court order or agreement in a settlement cannot change or assign the responsibility for the taxes that are owed.  Here are some options to consider.

Innocent or Injured Spouse

These are two concepts that focus on very similar issues but carry different results.

Injured Spouse:  The tax liability for your spouse remains, but the injured person receives the tax refund to which he/she was entitled based on his/her income and tax payments.  The injured person is not held liable for the other person’s misconduct.

Innocent spouse:  The IRS releases the innocent person in whole or in part from any responsibility to pay the assessed tax along with fines and penalties levied on the other spouse for filing a fraudulent return.

Innocent Spouse Relief is found in IRC Sec. 6015(b) (form 8875).  We note that it is hard to prove a person was truly innocent.  The burden of proof is on the person making the request.  To win on this, the innocent spouse must show:

  • The understatement was caused by erroneous information provided by the other spouse.
  • The innocent person had no knowledge of the errors and probably could not have known.
  • The innocent person did not derive benefit from the errors (he/she did not live in a luxury house, had house workers, owned a boat, took vacations, etc.).
  • Finally, it is found that it would be unfair to hold the person responsible based on the evidence.

A questionnaire (IRS form 12508) is used to help determine the facts in each case.  This form is provided to the other spouse, and there will most likely be contact between the two parties during this process.  That aspect can become a problem when accusations are being made about either side.

For details on how the IRS looks at this, you can check out the Internal Revenue Manual for 25.15.18 Innocent Spouse Relief Processing Procedures.

Injured Spouse Relief is found in the Internal Revenue Manual at 25.18.5.  As noted, this is a request that a non-liable spouse be entitled to receive his/her own refund even on jointly filed return.  The injured spouse claim is made with form 8379 Injured Spouse Claim and Allocation.  There are some catches to these provisions for community property states.  Since income and taxes are part of the community, the allocation may not be as favorable as the petitioning spouse may desire.  The IRS, under the Revenue Rules, will look to state tax and family law for guidance in these matters.  Given that different states handle the matter differently, there are separate rulings for various community states.

Injured Spouse Relief Community Property Rules:

  • Rul. 2004-71 for Arizona and Wisconsin
  • Rul. 2004-72 for California, Idaho, and Louisiana
  • Rul. 2004-73 for Nevada, New Mexico, and Washington
  • Rul. 2004-74 for Texas

Separation of Liability

The next option is a request for Separation of Liability under the Internal Revenue Code (IRC Sec. 6015(c)).  Under this process, the tax liability is acknowledged, but it is divided into two accounts.  This is the ultimate way to divide a valid tax liability and make sure the IRS will not come after one spouse for the entire amount due.  This course of action only applies to amounts that are currently unpaid.  According to this statute, the IRS cannot give refunds of amounts already paid in.

This action applies to under-statement of liability on joint returns where one spouse is deceased, or there is a legal separation, a divorce, or the couple has lived apart for the entire 12 months prior to filing Form 8857.

Equitable Relief

Along with the innocent spouse relief request and separation of liability, there is also an option for equitable relief.  This option is available when it is found that the imposition of the tax on an innocent person would be unconscionable.  This includes relief from a tax liability that flows from community income.

Section 4.03(2) of Rev. Proc. 2013-34 provides seven factors the IRS uses to guide a determination based on facts and circumstances.  This is not an exclusive list, and the IRS will look at other factors, positive and negative, to make a final ruling.

  1. Marital Status: Is the requesting spouse no longer married to the non-requesting spouse;
  2. Economic Hardship: What, if any, economic hardship will the requesting spouse suffer if relief is not granted [4.03(2)(b)];
  3. Knowledge or Reason to Know: Under section 6015(f), did the requesting spouse not know or have any reason to know that there was an understatement or deficiency on the joint income tax return.  There are several elements under this provision that are worth exploring in more depth and are beyond the scope of this article.  But the core question is if the non-requesting spouse maintained or restricted access to information in such a way as to disadvantage the requesting spouse and to keep that person uninformed as to the understatement or deficiency in an understatement case.  This also looks at the knowledge or reasons that the requesting spouse would not or could not pay the tax liability within a reasonable period of time after filing the return in an underpayment case;
  4. Legal Obligations: Was there a settlement that either spouse has a legal obligation to pay the liability, such as under a divorce decree or other legally binding agreement;
  5. Enrichment: Was there a situation in which the requesting spouse received a significant benefit from the unpaid tax liability or understatement;
  6. Good-Faith Effort: Did the requesting spouse make a good-faith effort to comply with the income tax laws in the years following the tax year or years to which the request for relief relates; and
  7. Health Issues: What is the requesting spouse’s mental or physical health.

There is no clear test that the IRS will use to evaluate relief claims.  There is not a single factor or mixture of factors that will necessarily determine the scope of relief, if any.  These will vary in each instance.

The final request, one that we hope will not apply to our readers, is relief based on abuse.  When a person is under duress and intimidation, they cannot be viewed as capable of entering into a contract.  The result is that they should be freed from the obligation and consequences they were forced to undertake.

This is a brief summary of options which are offered as information.  It is important to have a qualified tax professional review the facts and circumstances of a situation to see how this might apply and which options have the best likelihood of success.

Armand D’Alo and Robbin D’Alo

Tax Checklist for Divorce

Armand, Robbin and Eva are presenting a class offered through CCH CPE Link.  The class covers problems and issues missed in the heat of negotiation or simple errors in drafting documents.

Join us for a two-hour class that is insightful and filled with information.  If you are thinking of divorce, this is something for you.  If you are a professional, this is another tool to put in you box to help your clients.

This course will address the top ten tax issues that attorneys may miss to properly prepare divorce documents, filed with the Court. Participants will get a Checklist to use in each divorce file.

Who Should Attend

Tax practitioners at all levels regardless of tax practice who want to protect their divorcing clients interests — and their own. This is also an excellent resource for individuals in the midst of divorce — to help them identify key tax issues before signing their divorce agreements.

Topics Covered

  • Tax Forms to be signed during divorce proceedings
  • When $500,000 to him does not equal the $500,000 to her
  • Family support vs alimony and child support
  • QDROs
  • Final tax return — joint or separate — and why
  • Conflict of interests and releases
  • Personal residence — when one spouse moves out
  • Splitting tax breaks
  • Splitting prior tax debts and splitting other debts
  • Innocent spouse issues — and effect on the not-so-innocent spouse
  • And more.

Look forward to seeing you September 19 and 12:00 PM at CCH CPE Link.  Use the link above to check it out.

 

Armand & Robbin D’Alo

The Power of Professional Vulnerability

It is normal for people working through a divorce to feel guarded. The perceived lack of trust and commitment that has built over time makes it nearly impossible for one side to listen to the other. Couples at this point have most often been under a perpetual onslaught of criticism, distrust, and contempt. The most common learned behavior is avoidance – they just do not pay attention, give credence, or listen to the other side.

It is this defensive posture that leads so many to court. The belief is that the court will provide them with a forum for venting their grievance. They feel like the court is the only place where fairness can prevail. It is the way to make their partner listen to them.

This is where professional vulnerability comes in. Whether it is in mediation or collaborative divorce, when couples have trouble communicating needs and vulnerabilities they jeopardize their ability to reach a settlement. The attuned professional can step in to make those points known. By demonstrating the an expression of a vulnerability that has been observed, couples can see and learn skills necessary to move forward with their process and with life.

But how is this done without interfering with the couple’s task of direct negotiation?

MEDICAL STYLE - Couple in Marriage Counseling Session.Dan Wile practices a process he calls collaborative therapy. It is a method by which the therapist steps in the place of either person and takes on the “voice” of that person to acknowledge the two aspects of a dispute. First with the recognition of a position or action of the other person and then with a complaint coupled with the feelings that the complaint engenders. This is a powerful tool in mediation or collaborative practice.

For example, a couple that is splitting up over financial issues may experience fear. In the attack and defensive mode both people lose access to their communication skills. Their focus becomes narrowed. They can only perceive their attack position which is to state their point and make sure it is heard. They cannot access their own resources that could enable them to listen to another point of view.

MEDICAL STYLE - Couple in Marriage Counseling Session.At this point, the professional might move next to the person making the “attack” statement. Having an understanding of facts and circumstance from prior conversations, the professional might state, looking at the spouse, “The way you take care of the kids is admirable and it is clear you care deeply for them. That is probably why some of these expenses have happened. Yet the level ofdebt is scary and makes it hard to live with any degree of certainty.” The professional would then validate the statement to see if that was an accurate representation.

The same process goes to the other side as well making sure that both sides hear the positive intentions of the other and noting that there is a major complaint that has brought them to this point.

This is not therapy. It is not an attempt to heal the marriage. It is a place to open up the couple to some vulnerabilities of fear, anger, despair, and other emotions that might otherwise keep them from reaching their goal of a settlement. Like the One Last Look™ process we share with couples at the edge of divorce, sometimes it can open up a whole avenue of options for communication that they did not think were possible at this point in the relationship.

Professionals can act as teachers of communication methods in divorce situations. They can demonstrate the strategy of sharing feelings, staying as neutral as possible. Then they can help the couple to take a complaint, or a “demand” as they perceive it, and transform that into a need which they both probably share.

Cart ButtonUsing this process can help couples in divorce conflict to understand that all the blame and criticism are indications of needs for each person, both practical and emotional. By making these explicit and tangible, the solutions become workable.

Our common metaphor to help couples is to ask if their stated need can be put into a cart or added to a math equation. If they do not fit that criteria, then it is an emotion-based cry for something else.

Dan Wile PDF We are sharing an article from Dan Wile’s web site that is a very brief overview of his process. While therapists use this in practice for couple interventions, these patterns are often used in all our lives when we are attentive to the issues confronting us in a conflict situation. Everyone at one time or another has found themselves commenting as if they were the other person. It might have started as something like, “So I see that what I did made you feel … and if I had done … you might feel differently about this situation.” It is a matter of perceptive listening.

One caution is that when this is used in mediation or collaborative, it is more powerful to do both sides of the issue for the same event. That avoids the perception that the professional is taking a side in the matter. Equal voice to both sides builds trust that the matter is fully understood while avoiding added hurt or uneasiness within the negotiation.

 

Armand and Robbin D’Alo

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