The saying goes that the only things certain in life are death and taxes. But when couples divorce, tax ramifications that can be a financial “kiss of death” if ignored.
A key part of Alpha’s divorce mediation program is to carefully identify these tax issues for our clients. This ensures our couples have a true picture of their financial situation after the divorce dust has settled. We are fortunate to work hand in hand with Scott Rudolph, who is a CPA specializing in divorce tax implications.
Here are three important topics that show why tax concerns matter during divorce:
Review Previous 3-Years Returns. The first step is to review the last three years of tax returns to uncover any potential issues. Audit issues, missed deductions or tax carry forwards can have a impact on the couples’ future taxes. Each party who signs a return is liable for the information provided and the resulting tax obligations. On the positive side, a divorce tax planner may uncover missed deductions. Amending the return may produce thousands in tax refunds.
Plan for Future Tax Issues. It’s critical to address issues such as, tax filing status per Internal Revenue Service regulations, rights to the dependency deduction(s), related tax credits associated with the dependent(s), proper method for dividing assets to minimize tax liabilities and the impact of alimony and child support on taxes. For example, the tax credits associated with the dependent(s) may be the child tax credit, child care credit, educational tax credit and the earned income credit.
Questions to be considered include:
1. What is the best qualifying filing status?
2. Who should claim the dependents to minimize the overall tax liability?
3. Are deductions and credits being lost due to income phaseout?
4. How does one release the dependency exemption to the non-custodial parent?
5. Who is able to use any tax carry-forwards?
6. Which assets are more tax advantageous when dividing marital estate?
7. Do we have to pay taxes when we sell our home or other real estate?
8. How will alimony payments or child support change my taxes?
9. How do we properly divided retirement plans?
10.Do we need to adjust our Form W-4 with-holdings with our employers?
Your Owe How Much? You run the risk of literally tens of thousands of dollars in additional taxes. This is especially true when dividing retirement plans during divorce.
For example, you need a Qualified Domestic Relations Order (QDRO) in order to transfer the money from one spouse to another spouse’s retirement. These retirement plans include employee benefit or pension plans subject to ERISA (401K, 403B, defined benefit, etc.). Without this order, you will be liable for income taxes and/or the 10% early distribution penalty.
December Tax Planning is Too Late.There are also the missed tax savings by not properly structuring a tax plan that maximizes these savings. A proper plan can only be designed after running tax projections taking into account multiple factors to optimize the tax savings. It is critical that planning is pro-active and not re-active. Once the tax year is over, it is difficult to implement some of the necessary strategies. It is also important to note that the IRS does not rely on the information in the divorce decree, since a state court can not determine a federal deduction. They have their own regulations that need to be satisfied.
Make it a Win-Win Tax Plan. A neutral accountant that is experienced in working with divorcing couples will be astute in finding the most favorable solutions that minimize the combined tax liability of both parties. Therefore; instead of paying additional taxes to the IRS, they can share the benefit.
When each party has their own accountant, the accountants will each suggest strategies that benefit “their client” often to the detriment of the other party. This leaves little opportunities to make yearly modifications based upon financial changes or changes in tax law. Commonly after divorce, one party may benefit from certain deductions and credits to a greater extent than the other party. By structuring the tax terms of the settlement agreement to allow for some flexibility, a neutral accountant can review the situation on a yearly basis and adjust accordingly. The resulting additional savings could then be shared by both parties.
Keila M. Gilbert, Esquire founded Alpha Center for Divorce Mediation 18 years ago after her own divorce disaster. Their comprehensive divorce mediation program is offered to clients throughout the Delaware Valley including Bucks County, Montgomery County, Lehigh County, Chester County, Delaware County and Philadelphia as well as Broomfield and Loveland, Colorado and Bloomfield, New Jersey.
Scott Rudolph, CPA is a licensed Certified Public Accountant in Doylestown, Pennsylvania who specializes in providing tax planning and preparation services for divorcing couples. He has worked with hundreds of divorcing couples helping them navigate the intricacies of the tax code to maximize their tax savings. He has taken extensive continuing education courses specifically geared towards the tax ramifications of the divorce process. Mr. Rudolph is very passionate about making a positive difference in the lives of his clients and draws upon his own experiences to benefit them. Mr. Rudolph has a BS in Business Administration from Delaware Valley College in Doylestown. For more information, check out his website.
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