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Here is How the Taxation of Alimony is About to Change

Because the taxation of alimony is about to change, it may make sense to finalize your divorce before the end of 2018

New alimony tax rules, included in the Tax Cuts and Jobs Act, apply to divorce or separation agreements executed after Dec. 31, 2018.

Because the changes can dramatically affect finances, experts say the new rules intensify the divorce process.

They also raise the specter that at least one soon-to-be-ex-spouse could take a big financial hit.

 

New rules coming

Starting Jan. 1, alimony payers will no longer be able to deduct this outlay from their federal income tax. That means many will want to lock in alimony terms this year. That way, they will be grandfathered into existing rules, allowing them to deduct alimony this year and in the future.

In addition, alimony recipients will no longer owe federal tax on this support. Many may insist on waiting until next year to finalize divorce terms, believing that will benefit them financially.

However, the overall net impact may hurt them financially rather than benefit them. Many experts recommend that couples settle cases this year, before the changes go into effect.

Involving a knowledgeable financial advisor with experience in the financial aspects of divorce is the key to a fair resolution.

Divorce: How to Finalize

A recent survey of members of the American Academy of Matrimonial Lawyers found 95% of respondents expect the new alimony rules will change how divorces are settled.

And 64% expect the change will make divorces more acrimonious.

The law change has the potential to cost a lot of people big bucks.

In the 2015 tax year — the latest year for which the IRS has data — 598,888 taxpayers claimed the alimony deduction (on Form 1040). Their deductions totaled more than $12.3 billion.

Ginita Wall, director of Women’s Institute for Financial Education (WIFE) suggests, that anxiety has been rising this year among prospective alimony payers (typically men) and recipients (usually women).

In divorce workshops. “it’s become more of a life-or-death issue, for both men and women,” says Wall,

Alimony payers

For alimony payers, getting the tax deduction is very important.

The deduction dampens the financial impact of alimony on payers. The new rules removing it could hit payers three ways.

Not only will they lose the deduction, but without it some may be pushed into a higher tax bracket. Plus, they’ll still have to pay the spousal support with fewer available dollars.

For those reasons, many alimony payers should consider settling a divorce before the end of this year.

Doing so will allow them to deduct alimony in future years using existing rules rather than the new rules.

Alimony recipients

Alimony recipients have the opposite incentive. On the surface, many of them will be motivated to wait until next year.

The reason?

They will no longer owe federal income tax on alimony.

However, because payors will have more reasons to lower payments in settlements after this year, recipients may not come out ahead financially by delaying the divorce.

The size of any cuts in payments could exceed the savings from no longer owing alimony tax,

Many recipients would be in a low tax bracket due to other changes in the Tax Cuts and Jobs Act.

Here’s the bottom line:

In many cases, the alimony tax change will actually hurt women more than men.

How it works

Let’s say the court decides that the husband will pay spousal support of $3,000 per month for 10 years. We’ll assume he is in a high tax bracket and his combined marginal federal and state income rate is 43%.

Let’s also assume the wife is in a much lower combined rate of 18%. In this case, the net cost of the $3,000 to the husband is $1,710 and the net amount received by the wife is $2,460.

That’s quite a difference that will disappear at the end of 2018.

Ways to reduce conflict

  1. Act now. Both parties should strive to get a divorce settled this year. If the divorce isn’t executed this year, the new alimony tax laws will apply, and negotiations may have to start from square one. If that happens, attorneys’ fees and other costs of the divorce would likely rise. And it may be difficult to predict which spouse will most benefit financially.
  2.  Seek help. Divorcing couples should work out their finances together. But if anger and other emotions prevent this, they should seek help from an intermediary, such as a Certified Divorce Financial Analyst, to avoid slowing down the divorce process. Mediators can also help couples bridge their differences.
  3. Consider asset trades. If alimony is a sticking point, payers could consider offering an asset transfer, such as a lump sum payment, as an alternative to alimony. Among the attractions of this option: The value of asset transfer is not taxable to either party in the divorce. However, this option applies only to those who can afford a large up-front payment.
  4. Use appropriate tools. Calculators are available online to help roughly gauge how much alimony could be expected or awarded in a particular state. But be cautious; most alimony calculators haven’t yet been adjusted to account for the coming tax law change.

If we can be of assistance, don’t hesitate  Give us a call. The initial consultation is free of charge and comes with no obligation.

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Understanding Your Divorce Settlement

So you’ve made it to the other side.  The divorce is final and it’s time to start moving forward.  You’ve made it through the tears and anger.  The overwhelm of change that occurs through the divorce process did not defeat you and you are facing a new life that you can’t even really envision yet. I see a lot of people get stuck here for a while.  I’ve even witnessed some revert to the single days of youth with no responsibilities or boundaries.  This is where some not-so-smart choices about money, jobs and homes are made.  Don’t be that person.  It’s a waste of time and it’s likely to bring regret. Now, is the time to start to heal and move forward.  This is where you can begin to build something positive and meaningful from all that you’ve been through.

 

Job number one to build a healthy new life is KNOW YOUR SETTLEMENT! I know it’s been a difficult process and you really want to take a break, but this is of crucial importance.  I come across many people who aren’t sure exactly what they’ve been awarded. And still, because they really just want to be done with attorney fees, they don’t call their attorneys. But believe me, this may very well represent the best return of all the fees you have paid.  Read through your final decree and MAKE SURE you understand everything in it.  If you don’t, either suck it up and schedule another hour with your attorney or use a divorce specialist like me to help you.  Part of the post-divorce transition assistance that my company (and others like it) offers, includes reviewing your decree, setting up accounts and walking you through the transfer of any assets that need to be transferred.

 

At this time, if you haven’t heard it before, you’ll likely hear that dreaded term, QDRO. (Pronounced quadro.) This is another legal document that you might need if you’re supposed to get part of your former spouse’s qualified retirement account.  I’ve had individuals come to me after their divorce who can’t figure out why they never got the 401k or pension payments that they were entitled to. That’s because no one did a QDRO or told anyone that one (or more) was needed! It’s crazy!  But it does happen, and you don’t want to be the one to miss out on an awarded pension because the QDRO was filed too late.

 

Once you know what you have, now you need to know how to manage it to make sure it lasts!  Enter your trusted partner financial advisor. Get one!!! You going to need a professional. Here’s my best advice about finding one. The truth is they all have mostly the same products and services at their disposal. Some only use one or two, some use 20. Some are commissioned based, some fee based. Some like complex and some like simple. Knowing and understanding all of the expenses/fees you are paying to them is one of the most important issues. Also, hire someone you like and trust! Even if it’s just a gut feeling. Trust it. Don’t be dazzled by sales tactics. Choose the person who felt like a friend. In the long run, you’ll be much happier. Give us a call. We’re here to help!

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The Mediation Option & How to Prepare

Most people facing a day in court would avoid it if they could.  When facing divorce, that urge is just as strong. So, the first step you may want to take is to go through mediation. The mediation process helps you and your partner reach a mutually beneficial divorce settlement.

So, Why Mediation?

Besides the whole, court avoidance thing, if you have children, jointly owned real estate, and investments, mediation may be the wisest option for you. Once you have decided on a divorce, the next step is to decide how to split up your assets and set child custody, support and visitation rights. A mediator is an impartial third party that guides a couple in the negotiations preceding the actual divorce.

Unraveling your marital ties is a very emotional thing in addition to the trust issues and pain. During this time, many find it hard to stay rational, and a mediator can help you both reach the point where you can agree and compromise on important decisions. While a mediator can’t give legal advice, they can teach you to communicate more efficiently.  In situations where both parties desire to reach an amicable agreement and can stand to be in the same room, mediation may be the right choice. You can even conduct mediation over the phone if needed.

Mediator, Take The Wheel?

If you do choose mediation as an alternative, you still need to be prepared.  Divorce court is not a place to fly by the seat of your pants.  Neither is the divorce mediation.  It still comes with many of the stressful procedures of a typical case.  And if you go in unprepared, you may lose out on the settlement that you desire.

Mediators only work with you and your partner to settle the important decisions a divorce forces you to make.  They will not tell you what you should do.  Nor will they make decisions for you. So think about what you want your life to look like when this process is done, focusing on what you need from the separation to get there.

Meeting with Your Divorce Mediator

When you go to your first meeting with your divorce mediator, bring a list of all of your jointly owned assets, a valuation of your home, copy of a prenuptial agreement if you have one, copies of income tax returns, and retirement account statements. This is where having a financial expert like a CDFA becomes paramount to the mediation process.

Take a notebook and pen, and ask any questions you may have.

Write down everything you need to remember, and discuss their fees. The first meeting with a divorce mediator will be to assess your situation, get a feel for the chemistry between the couple, and to get to know the mediator.

Although the mediation is held in an office or meeting room, it should still feel like an informal atmosphere. The mediator strives to create a relaxed situation so that both partners can remain calm. One of the main goals of the mediator is to help the couple find creative ways to communicate and reach an agreement. Especially if strife does exist between the couple.  There’s no set frequency for a session because every divorce is unique. Some couples find they only need a few sessions, while other may need more.

You will likely find that mediation saves money on attorney fees and is one of the best ways to prepare for your divorce. Ultimately, the ability to avoid court should make for a better outcome for the whole family. Give us a call…we’re here to help.

 

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How Much Alimony (Spousal Support) is Enough?

Many couples going through divorce know that some level of Spousal Maintenance or Alimony is needed, but have no idea how much or how long. Most attorneys will go by your budget numbers, which in my experience are almost never accurate. Attorneys are also paid to do their best for their clients so if you’re the payor, they will argue for the lowest number possible and if you’re the recipient, they’ll argue for the highest number possible. There is a better way!

So, if you don’t already know, I am a huge advocate of negotiated settlements whether you use attorneys or not. So where’s the right number and how do you find it? Here’s what a CDFA™ does to help. We do a full financial projection for each party for 20 years into the future. Include all expenses, income, assets and liabilities. Basically a full financial plan for each person reflecting whatever settlement agreement they are considering.

Once you have that compiled data in front of you, it becomes easier to find the sweet spot that is a win for both parties. We want both parties to move into the next phase of their lives with confidence that they will have the financial futures that they envision and are comfortable with.

Once we can show that the payor’s net worth and cash flow are positive and increasing and he/she can still reach their financial goals given a certain level of maintenance, they’re far more likely to reach an agreement. Don’t spin your wheels trying to convince the other side you’re right without the numbers to back you up! Give us a call. We’re here to help.