Monday, September 3, 2012

Divorce Done Well.

UGH! Tax time again. Already? I met with my personal accountant the other day. Our yearly gathering- where he feels obligated to ask if I paid my quarterly estimated taxes and I sheepishly admit that, yet again, I did not. I am a very responsible person but just do not give my personal taxes much thought throughout the year. I have this meeting and vow to change and pay my quarterly taxes this year, but then go about my life as usual, until this time next year. Perhaps, you don’t give much thought to taxes either and this has worked as well for you as it has for me.

Well, now you are getting divorced. That changes things and taxes need to be thought about carefully. When you are revamping your financial picture you need to know how taxes will impact your plans. If you plan to split your spouse’s 401K money and you are taking your share as cash in a lump sum distribution you will have to pay taxes (but can avoid the 10% early withdrawal penalty by completing a QDRO). The bottom line number you thought you had in hand to pay for your new expenses is not what you will receive from that 401K. Uncle Sam takes his cut first and then you get the rest. You will lose money to taxes now and the investing and earning power of that money for the future. Would a different strategy make more sense?

There are tax consequences regarding your house. What if you decide that one of you keeps the house for now and will sell in five years, after your youngest graduates from high school? The exclusion for the capital gains tax for a singleton is $250,000 but $500,000 for a married couple. So you may end up “losing” $250,000 of tax-free money depending on the decisions you make. Another example of tax implications is that spousal support (alimony) is tax deductible to the person making the payments and considered as taxable income to the person receiving payment. Child support is not tax deductible for the person paying it and not considered as income for the person receiving it. This information may change how you originally wanted to structure your post-divorce finances.

These are just a few examples to illustrate how important taxes effect what you think you are walking away with and what your bank account will reflect you actually have to live with when divorcing. At Westfield Mediation, LLC, we always encourage our clients to consider the tax implications when making their decisions. We also recommend that clients review their Memorandum of Understanding with their accountant to fully understand their choices and get suggestions on how to save money in taxes if they do things differently. Knowledge is power and we want our clients to make decisions from a position of strength. Once your new life is established you can go back to not worrying about taxes again, until this time each year.


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