| Legal impact of divorce and what one should consider |
DIVORCE WITH DIGNITY - THE RIGHT WAY - DIVORCE NEED NOT BE AN UGLY WORD - ITS HOW YOU DO IT - THAT WILL ULTIMAELY MAKE IT OKAY OR NOT OKAY....↓
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THIS is not legal advice; ALL information on this page and website are intended for informational and educational purposes only and should not be used as a substitute for the specific legal advice of your own attorney. Private Courts is not responsible for any action or omission of any third party based on information obtained from this website.
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Private Courts will assist participants to identify pertinent issues and will help Parties decide which professionals and experts they may need on their resolution team. Below is a discussion of taxes which illustrates how imprtant it may be to have a CPA available to call with questions that impact your returns. The following discussion is not meant as advice, but merely as an indicator of issues to be considered with your advisors. Private Courts and the Mediators do not take responsibility for the accuracy of this information and note that all the indicators below may be changed by IRS or the Law at anytime and Parties should rely only on the information provided by their own experts.
TAXES: One of the most significant and often underestimated concerns is the divorcing couples relationship with the IRS. It is extremely important that your Marital Settlement Agreement delineate the matters significant to their future tax returns.
These are the considerations impacted by your divorce:
Your filing status will change from married filing joint to single or if you have at least one child living with you, to head of household, If you want to alternate this status, it can only be secured by written agreement;
There will be a change possibly resulting in reduced personal deductions, as you no longer claim your spouse; or you may acquire more deductions when you split deductions for dependents which will require agreement between the parties.
Your tax bracket will change when incomes are separated out and when you file separately;
Itemized deductions such as state income taxes, real estate taxes, mortgage interest, charitable contributions, and non-reimbursed employee business expenses may affect your return differently.
Alimony is taxable to the spouse receiving it and you are required to pay quarterly estimated taxes on it, and deductible to the spouse paying it. This needs to be factored into your income. However, child support is a non taxable event. Section 71 of the Internal Revenue Code defines certain rules for payments to be considered alimony. If these conditions are not met then the tax benefits of alimony could be revoked by the IRS. Alimony payments must be in cash, to your ex-spouse, designated in a divorce or separation agreement, and you must live in separate residences. Payments must terminate on death of the recipient; alimony cannot end on dates corresponding to dependents 18th or 21st birthdays. Alimony cannot be front loaded over the first three years (much larger amounts paid in the 1st year compared to the 2nd or 3rd year).
The effects of AMT (alternate minimum tax) may not be changed without your spouse’s income and deductions.
Negotiating Dependency Deductions. In 2005, the exemption amount for each dependent is $3200. In a divorce or separation, the custodial parent specified in the agreement is entitled to the exemptions or without an agreement, the parent with physical custody gets the exemptions. The lower income parent can sign over the exemption to the higher income parent using IRS form 8332 resulting in greater tax savings to the higher income parent. For example a $3200 exemption for a person in the 31% bracket would save over $1000 while a person in the 15% bracket would save under $500. The value of exemptions starts to phase out for income above $145,950 for a person filing as single, so the exemption may only be effective for a lower earning spouse. Don’t forget to factor in the child tax credit ($1,000 for each child under age 17) and dependent care credits for up to 2 children under 13 ($960 or more).
Not Using IRS Code Section 72t(2)c to Get Distributions from Qualified Plans. More often then not, couples in the process of a divorce have severe cash flow problems. Income stays the same, but expenses increase dramatically because there are two households to support. Changing or downsizing one or both parties' lifestyles often requires a cash infusion to purchase, set up, or carry a second residence. Section 72t(2)c allows the alternate payee (the spouse who is not the employee) to take distributions from a qualified plan (not an IRA) without paying the 10% early distribution penalty even if they are younger then 59 ½. The distribution is still subject to income tax. If the funds are first rolled over into an IRA then the preferred distribution rules no longer apply.
Disregarding the Impact of Taxes on Assets in a Divorce Settlement. The marital assets you keep after the IRS gets its share is the real bottom line. Say your spouse handles all the investments and offers to split them 50/50. Would you rather have cash in the bank, an IRA, or the Microsoft stock you bought in the early 1990s? Each of these assets is taxed at a different rate. Avoid assets that are unattractive from a tax point of view such as low-basis stocks (those that have increased dramatically since you bought them), partnerships where depreciation might be recaptured, or retirement accounts where you have to pay tax on the money you get. Look at the value of assets you will receive on an after-tax basis. Then decide if the deal is fair.
Take Advantage of the Full $500,000 Home Exclusion. Married couples are allowed up to $500,000 in profits tax free from the sale of their principal residence. Formerly, a spouse who moved out as a result of divorce lost his $250,000 deduction because it was no longer his principal residence, but thanks to a change in the tax law an ex-spouse can now retain that exclusion. To qualify, the spouse who moved out must remain an owner and the divorce or separation agreement must grant him use of the home. The ex-spouse must have lived in the home for two years at any time prior to the sale. If these rules are not followed, the spouse selling the residence will only be able deduct a $250,000 gain and will have to pay tax on the second $250,000. Capital gains tax on $250,000 is $37,500 and state income taxes may also apply. If a spouse who is the sole owner remarries, the new spouse must live in the house for two years to qualify for the full $500,000 exclusion.
Writing Off the Cost of Your Divorce. The portion of the cost of your divorce which relates to tax and financial advice is deductible on Schedule A of form 1040. To substantiate this deduction you should obtain a statement from your attorney or mediator delineating the cost of legal services and the amount attributable to tax and financial advice. Normally the deductible portion of your divorce runs from 1/3 to ½ of the total cost. In order to deduct legal fees, you must be filing Schedule A (Itemized Deductions) and your deductible divorce fees must be greater than 2% of your income.
This is general information and not intended as advice nor does it replace the importance of legal advice and expertise that is required of Professionals such as your CPA and/or attorney.
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Divorce, Remarriage, and Social Security
Changing Your Name on Your Social Security Card
If you change your name, be sure to tell both Social Security and your employer. This will assure that your earnings will be properly reported by your employer and recorded in our records. You can get a new card from Social Security with your new name.
How Divorce Affects Your Future Retirement Benefits
If you are divorced after at least 10 years of marriage, you can collect retirement benefits on your former spouse's Social Security record if you are at least age 62 and if your former spouse is entitled to or receiving benefits. If you remarry, you generally cannot collect benefits on your former spouse's record unless your later marriage ends (whether by death, divorce, or annulment).
How Divorce Affects Survivors' Benefits
If your divorced spouse dies, you can receive benefits as a widow/widower if the marriage lasted 10 years or more. Benefits paid to a surviving divorced spouse who is 60 or older will not affect the benefit rates for other survivors receiving benefits.
How Remarriage Affects Survivors' Benefits
In general, you cannot receive survivors benefits if you remarry before the age of 60 unless the latter marriage ends, whether by death, divorce, or annulment. If you remarry after age 60 (50 if disabled), you can still collect benefits on your former spouse's record. When you reach age 62 or older, you may get retirement benefits on the record of your new spouse if they are higher. Your remarriage would have no effect on the benefits being paid to your children.
Source: Social Security Online
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You can receive benefits on your ex-'s Social Security record if he is receiving Social Security benefits (or is deceased) and: your marriage lasted 10 years or longer; you are presently unmarried; you are age 62 or older (if he is deceased, you can collect benefits at age 60 or age 50 if you become disabled); and you are not entitled to an increased benefit on your own record which exceeds one-half of your ex-'s unreduced benefits.
If your ex-has not applied for benefits, but can qualify for them and is age 62 or older, you can receive benefits on his record if you have been divorced from him for at least two years and meet the requirements listed above. If your ex-is deceased, you can receive benefits on his record even though you were not married to him for 10 years--
Your benefits will continue until the child reaches age 16 or the child's disability ceases. The amount of benefits you receive as a divorced spouse does not affect the amount of benefits another spouse receives on your ex's record.
Many parties get a higher benefit based on their ex-'s work record than they get on their own record, especially if he is deceased. If you've never asked Social Security about receiving benefits on your ex-'s record, you should do so. When you apply, you'll need to give his Social Security number. If you don't know his number, you'll need to provide his date and place of birth and his parents' names.
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HELPFUL TIPS FOR PARENTS OF FOUR-YEAR-OLDS AND UNDER
The next few months will be difficult ones for you and your child as your family restructures itself. Know that how a child reacts varies according to developmental level and each child should, therefore, be treated differently. The degree to which divorce has a negative impact on your child is in your control. While that may seem daunting and/or unbelievable, there are very specific things parents can do that will radically alter your child(ren)'s experience of divorce.
First and foremost, please recognize the four-and-under crowd (for the most part) lacks the cognitive ability to both understand abstract concepts and contextualize what is said to them. For this reason, you cannot expect to talk to your child about divorce the same way you would an even slightly older child. Nor can you expect your child to talk about her/his feelings or ask questions the same way an older child could.
Understand your child’s temperament. Is she/ he flexible and/or easy, fearful and/or slow-to-warm or feisty and/or difficult? Each of these groupings will need different kind of parenting and the more you understand about your child’s response to change, the easier it will be to help her/him.
Parents can take certain steps that will help significantly with how their child(ren) will experience the divorce. Within the first five years of a child’s life, the primary developmental tasks move from attachment formation and development of trust as an infant, to an emerging sense of independence and ability to self-soothe as a toddler. This stage is marked by exploration. As a child grows older, the independence stage becomes primary; children in this stage are also developing verbal skills for the expression of feelings and needs.
Understand where your child is developmentally. What developmental tasks has your child mastered and what is your child just learning? Know it is normal for your child(ren) to regress during this time, but constant assurance that you love her/him will go a long way. Do not just tell your child(ren) this, be sure to reinforce it with lots of hugs and physical affection.
It’s important to recognize it as perfectly normal for your child to have negative reactions to a change in family structure. Given the number of developmental tasks with which young children are faced (and how overwhelming it may feel to them at times), it may be helpful to anticipate these negative reactions. Expect them to manifest in the appearance of developmental regression. This means that tasks they may have appeared to have previously mastered may no longer be so.
Do not think because your child(ren) cannot understand your words they do not understand the intensity of your emotions. Babies and toddlers are reactive to the emotions their parents are experiencing and may, in fact, feel flooded with painful feeling and emotions they are unable to express. This may result in increased crying, apathy or clinging, as well as disturbances in sleeping or eating patterns.
All children need to hear and understand they are not the reason for the divorce. Because young children are developmentally so ego-centric, it is quite typical for them to make the association between something they did that made a parent angry and that parent’s departure.
Be sure to remind your child the divorce is not her/his fault—and accompany it with lots of physical affection and reassurance. Let your child know you will always love her/him. These messages bear frequent repetition.
It is absolutely essential to protect your child from conflict. Be sure to reduce the level of inter-parental hostility as much as possible.
In order to reduce the level of conflict, it may be helpful to work on your own level of acceptance—try to think of your new relationship with the other parent as a business one and observe the same rules of conduct you would with a co-worker.
Finally, do not think of your divorce as something for which there is a "better" or "worse" time, in so far as your children's development and response to it is concerned. With divorce, there is no "better" or "worse" time, just different issues that will surface for your child (remember, those issues will surface differently), depending on her/his age. Remember, one of the most difficult jobs about being a parent is you are modeling everything for your child(ren). While divorce is tremendously painful, it is also an invaluable opportunity to model both how to nurture and take care of yourself, as well as healthy emotional responses. Pain and anger are normal feelings—it is what you do with them that determine how your child will experience her/his environment, and in turn, learn to respond. As difficult as it may be to accept, a happy, stable, single parent has infinitely more to offer a child that one embroiled in pain, uncertainty or a loveless relationship.
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