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The Tax Implications of Divorce and Separation by Joanie B. Stein, CPA

Posted on October 30, 2017 by Joanie Stein

Among the many financial and emotional issues that couples will encounter on their road to a divorce are the implications that a final dissolution of marriage will have on their taxes. Following are some important tax-related issues for separated and divorcing couples to keep in mind.

Tax Filing Status

Legally separated and divorced couples have the option to file their individual tax returns as single taxpayers, or they may choose to file as heads of household when they have custody of minor children and are not married on the last day of the year. Couples whose divorces have not become finalized by the last day of the calendar year have the option to file a joint tax return as married filing jointly, or they may file two separate tax returns as a married couple, whichever will result in a lower tax burden. Often, this determination is best made under the guidance of an accountant, who can run the numbers for each filing status and determine which is more financially advantageous.

Estimated Tax Payments

Couples that make quarterly estimated tax payments during their marriage must determine which spouse will receive credit for those payments and any overpayments made in the year prior to a legal separation or divorce. While the credit will typically apply to the former spouse whose social security number is listed first on a prior year’s tax return, the IRS allows divorcing couples to come to an agreement to allocate estimated tax payments in any manner they choose. For example, a couple may agree to divide the payments equally, or they may choose to allow one individual to claim all of the payments, leaving the other individual with none. When agreement cannot be made, the IRS will typically divide the credit for prior year estimated tax payments proportion to each party’s separate tax liability.  On a related note, taxpayers should remember that a divorce will ultimately change the amount of estimated taxes they will be required to pay each quarter.

Alimony and Child Support

The alimony an individual pays to a former spouse is tax deductible to the individual making the payments, as long as those payments are a requirement contained in a divorce decree or separation agreement. Any money given voluntary to a former spouse, outside of the final dissolution of marriage, is not deductible.

Alimony recipients must include those payments as a part of their taxable income on their annual tax returns. Under certain circumstances, it may be advantageous for recipients of spousal support to make estimated tax payments throughout the year or increase the amount of taxes withheld from their wages in order to avoid the possibility of a significant tax bill that alimony payments will create.

Name Change

Individuals who change their names after a divorce must notify the Social Security Administration (SSA) to ensure that the name on file with the SSA matches the name on their tax return. This can be accomplished by completing Form SS-5, Application for a Social Security Card, which can be found online at www.SSA.gov or by calling (800) 772-1213.

In addition, individuals who purchase health insurance through an Affordable Health Care Marketplace must report to the Marketplace any changes to their names or addresses. Should an individual lose health insurance due to a divorce, he or she must enroll in new coverage during the Special Enrollment Period.  Obamacare requires all individuals to have coverage for every month of the year or risk exposure to an individual shared responsibility payment.

Investments and Financial Accounts

To ensure that one spouse does not remain responsible for the liabilities of the other spouse, it is recommended that divorcing couples close joint credit card and bank accounts. One a couple settles all of their marital debts, each spouse should then open new accounts in their own names. It is equally important that individuals update the named beneficiaries on all of their financial accounts, including retirement plans and insurance policies, to ensure that their assets will not be passed to an ex-spouse upon their death. Any contributions an individual makes to his or her Individual Retirement Account (IRA) before the issuance of a final divorce decree is tax deductible only to that individual; Contributions made to a former spouse’s IRA are not deductible.

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies.  She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.

Tax Considerations for Divorced and Divorcing Couples by Joanie B. Stein, CPA

Posted on January 13, 2017 by Joanie Stein

Couples who separated or began the process of divorce during 2016 should remember that their marital status will affect their individual tax filings in April 2017. Following are some tax tips to keep in mind.

Name Change. Individuals who change their names after a divorce must notify the Social Security Administration (SSA) by completing Form SS-5, Application for a Social Security Card, which can be found online at www.SSA.gov or by calling (800) 772-1213. It is important that the name on an individual’s tax return matches the name on file with the SSA to prevent any delays in the processing of the tax return and potential refund.

 

Alimony Paid. Individuals may deduct alimony paid to a spouse or former spouse under a divorce or separation agreement by entering the spouse’s Social Security Number or Individual Taxpayer ID Number on Form 1040. However, voluntary payments made to a former spouse outside of the divorce or separation agreement are not deductible. The same holds true for and property settlements, which are neither deductible nor taxable as income.

 

Alimony Received.  Alimony is considered taxable income to the recipient. Because these payments are not subject to tax withholding, recipients may need to adjust the amount of taxes they pay throughout the year by either increasing the amount withheld from their wages or making estimated tax payments.

 

Child Support. Payments of child support are neither deductible by the payer nor taxable to the recipient.

 

Spousal IRA. If a divorce decree or maintenance is finalized before the end of the tax year, an individual may only deduct contributions made to their own individual retirement accounts; Contributions to a former spouse’s IRA are not deductible.

 

Filing Status. Married couples who separated but did not yet finalize a divorce during the calendar year have the option to file their 2016 tax returns jointly or as married filing separately. Once the divorce is final and filed with the court, neither party may file jointly for that or any subsequent tax year.

 

Health Care Law Considerations. Under the Affordable Care Act, individuals who purchase health insurance through a Marketplace must report any changes in their personal circumstances (i.e. name change, address change) to the Marketplace to ensure they receive the proper financial assistance to which they are entitled. Similarly, should an individual lose health insurance due to a divorce, he or she must enroll in new coverage during a Special Enrollment Period.  Obamacare requires all individuals to have coverage for every month of the year or risk exposure to an individual shared responsibility payment.

 

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.

 

8 Tips to Help Women Improve Financial Literacy by Kathleen Marteney, CRPC

Posted on July 02, 2016 by Richard Berkowitz, JD, CPA

For too long, women were socialized to believe that they were bad with money or that financial management was a role better left to their husbands. While women have come a long way, there remains a significant gender gap in financial literacy.

 

According to the results of a recent study conducted by the Global Financial Literacy Excellence Center at the George Washington University School of Business, women are less likely than men to provide correct answers to questions about basic financial concepts and more likely than men to admit that they do not know the answer to such questions. This lack of self-confidence in women’s abilities to manage money is alarming, especially considering that women outlive men.

 

Ninety percent of women will need to be self-reliant with financial decisions at some point in their lives, due to late-in-life marriage, divorce or widowhood. Rather than sitting on the sidelines, women of all ages should get in the game and start to take responsibility for their long-term financial success, now, before divorce or a spouse’s death results in financial surprise in the future. Here are some tips to get started:

 

  1. Be actively engaged in pursuing knowledge and building financial self-confidence.
  2. Ask questions and begin a conversation about personal finance by focusing on a topic on which you feel comfortable and to which you can relate easily.
  3. Be involved in financial decisions that affect you or your family.
  4. Pay yourself first by participating in an employer-sponsored retirement plan. Or, if you are self-employed or are a stay-at-home parent, create a retirement plan that you can contribute to for your future.
  5. Spend less than you earn.
  6. Build an emergency fund equal to three- to six-months of expenses.
  7. Set short- and long-term goals and develop an estate plan, including a will, which you can review regularly to ensure it continues to meet your needs and life circumstances.
  8. Seek the guidance of experienced financial advisors who you can trust to guide you through the process and help you make the decisions that are key to your long-term financial success.

 

About the Author: Kathleen Marteney, CRPC, is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. She can be reached at 800-737-8804 or via email at info@provwealth.com.

Provenance Wealth Advisors, 200 S. Biscayne Blvd., Miami FL 33131 (954)712-8888

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax and legal matters with the appropriate professionals. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

 

 

 

 

 

 

8 Ways to Save a Marriage from Financial Infidelity by Stefan Pastor

Posted on June 02, 2016 by Richard Berkowitz, JD, CPA

As wedding season approaches, it is a good time for couples to address the risks of financial infidelity.

 

Not all couples are financially compatible; one partner may spend or save money differently from the other. However, when a spouse intentionally hides assets or significant financial information from a partner, red flags should go up.  Such unfaithfulness can be a sign of larger marital issues and as devastating to a marriage as sexual infidelity.

 

According to a recent survey conducted by Harris Interactive and the National Endowment for Financial Education, 42 percent of adults admitted to committing financial infidelity and more than 75 percent reported that such deceit negatively impacted their relationships. Moreover, the results of a recent survey conducted by credit reporting agency Experian revealed that 40 percent of newlyweds did not know their spouses credit score before walking down the aisle, despite the fact that 80 percent of respondents believed that financial responsibility is an important characteristics of a spouse.

 

While it is perfectly normal for a marrying couple to maintain separate bank accounts, both spouses should be forthright in sharing their financial information, including assets, earnings and debt. Doing so will go a long way to preserving the couple’s shared financial goals, which may include purchasing a house or savings for a child’s education or their own retirement.

 

Broaching financial topics may not easy. Following are eight tips to get the conversation started and keep couples financially faithful.

 

  1. Share everything, including credit scores, financial obligations, business interests, estate documents and spending habits. Transparency is key to cooperation and marital harmony.
  2. Work together to establish short-term and long-term financial goals and be prepared to compromise.
  3. Establish a budget based on current earnings and expenses with an eye on shared financial goals for the future.
  4. Set a dollar amount that each spouse will need to agree to before the other makes a big purchases. The amount could be as small as $100 or as large as $5,000 of more.
  5. Share account information so that one partner may access the other’s accounts in the event of an emergency.
  6. Look at the big picture. While a couple may have different spending habits, it does not mean their marriage is doomed.
  7. Consider the benefits of a prenuptial agreement before walking down the aisle.
  8. Seek the advice of a qualified financial advisor who can begin a dialogue about financial fidelity and guide a couple to help make the right decisions that meet their particular needs and goals.

About the Author: Stefan Pastor is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and he is a registered representative with Raymond James Financial Services. He can be reached at (954) 712-8888 or via email info@provwealth.com.

 

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Provenance Wealth Advisors and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

 

 

 

How Divorcing Couples Can Manage Estimated Tax Payments by Sandra Perez, CPA/ABV/CFF, CFE

Posted on May 10, 2016 by Sandra Perez

Among the many financial issues that arise following a divorce is the allocation of estimated tax payments and prior year overpayments. Often overlooked during the throws of divorce negotiations is who gets credit for estimated payments already made and prior year overpayments elected to be applied to next year’s liability.  While married, many couples file their annual tax returns jointly and submit their estimated tax payments quarterly to account for income earned from self-employment, business earnings, interest, rent and dividends, none of which are subject to withholding tax.

However, once the parties begin to file separate returns, challenges may arise when attempting to determine to whom the previously paid estimated tax payments belong. Understanding how these estimated tax payments and prior year overpayments should be allocated can get thorny.

While these payments will typically get credited to the taxpayer whose social security number is listed first on a return, that does not have to be the case.

 

Dividing Estimated Tax Payments in the Year of a Divorce

An individual’s tax status is determined on the last day of the calendar year. If legally separated or divorced from a spouse on December 31 of the year at issue, he or she is considered unmarried and therefore required to file an annual tax return with the status of “single” or “head of household”.  To the extent a couple made estimated tax payments towards the liability for the year in question, a decision needs to be made as to who should take credit for these payments on the former spouses’ separate tax returns.  The IRS allows divorcing couples to allocate these estimated tax payments in any manner by agreement of the parties.  For example, a couple may opt to divide the payments equally, or they may choose to allow one individual to claim all of the payments, leaving the other individual with none.

Despite the freedom the IRS allows couples to exercise to make this decision on their own, reaching agreement on this matter can be as complicated as most divorce negotiations. When consensus cannot be achieved, the IRS requires the payments to be divided in proportion to each party’s separate tax liability.

While this strategy seems practical, it may cause more complications upon implementation.  This is especially so given that there is neither a reliable way to put the IRS on notice that estimated tax payments will have to be allocated on separate returns nor is there a way to communicate to the IRS how the payments should be allocated until one of the parties files a return. .

Consider the scenario of a couple with a contentious relationship in which the first listed “taxpayer” has less income to report than the second listed “spouse.” If the “taxpayer” files before the “spouse” and claims all of the estimated tax payments made, he or she may end up with a refund, leaving the “spouse” with an unexpected liability to pay in.

If both parties claim estimated tax payments that together total more than the amount they paid in, they will create confusion with the IRS. As a result, there will be a delay in the processing of the returns and a delay on any anticipated refund.

To the extent the parties can reach an agreement on how the payments will be allocated, each must include the former spouse’s social security number on his or her individual Form 1040 tax filing. Additionally, both parties may include a copy of that agreement and/or the calculation of how the allocation was derived.

 

Dividing Tax Overpayments in the Year of Divorce

Generally, in any given year, when a refund is determined, the taxpayer(s) can elect to directly receive the funds or to apply the refund to next year’s tax liability. This second option is considered to be an overpayment. Again, these overpayments are many times overlooked in a divorce. Overpayments are treated similarly to estimated tax payments. The parties can agree on how they will allocate the overpayment on their separate returns. However, if there is no agreement, the party that made the payments that gave rise to the overpayment in the prior year gets to take the credit on his or her tax return. If the parties made the payments jointly, the overpayment would be applied in proportion to each party’s separately filed tax liability.

 

What to Do

While allocating estimated tax payments and prior year overpayments can be messy, some steps can be taken to make it less so.

 

Early in the divorce process, both parties should attempt to identify what estimated tax payments they made and whether there is a prior year overpayment to be allocated. Both parties should be put on notice that they should not take any portion of the payments until an agreement is reached on same. Let each party’s tax accountant work together or with divorce counsel to determine how to best utilize the payments and avoid complications with the IRS. Include the prepaid estimated tax and overpayments as assets when determining the equitable distribution. By putting this asset in the column of the person who is going to, or has already, taken the payments on their separate return, it will offset against other assets being divided.   With proper planning and even a little creativity, both parties can maximize the benefits of these prepaid tax assets.

 

 

About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensic Services practice with Berkowitz Pollack Brant, where she works with attorneys and high net worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email sperez@bpbcpa.com.

 

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