6 Financial Mistakes to Avoid in Divorce

If anyone is facing a potential split, the whole thing sounds daunting. Here’s a quick list of financial pitfalls to avoid. Hopefully, a little more information helps empower you during the trauma involved in divorce proceedings.

From FOX Business.com:

Divorce takes an emotional toll, and if you are not careful, it can often take an economic one as well. Protect your credit and come through divorce under the best possible financial circumstances by avoiding these common mistakes.

1. Trying to get even

Think twice about trying to exact financial revenge for wrongs committed against you in the marriage -- it could cost you in the long run. The more you argue over the division of assets, the more you'll end up paying legal and other professional fees, says Jeff Ivory, a partner with Stonebridge Financial Partners. Those fees could cripple you financially as you start your new life and affect your ability to get credit.

Instead, keep "the personal stuff" out of the equation, approaching the division of assets in as civil a manner as possible, he advises. Consider working with a financial professional or mediator instead of opposing attorneys.

2. Maintaining joint credit

Maybe you forgot that jointly held credit card, or maybe you agreed to keep the card open and accessible to both of you, for whatever reason. Either way, big mistake. "If everyone is cooperating, it works, but when someone doesn't pay or runs up debt, the other spouse remains liable," says Jerry Cohen, a certified public account specializing in financial forensics.

Before divorcing, pull your credit report from all three major credit bureaus -- Experian, Equifax and TransUnion -- and pay off jointly held cards, if possible. Otherwise, transfer any balances to one person's name and then close the joint accounts. If you're concerned that your spouse might open a joint account during the divorce proceedings, consider placing either a fraud alert or security freeze on your credit by contacting the credit bureaus.

Continue reading here

Questions for the Tax Lady: February 14th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I'm thinking about moving to Pakistan for a new job opportunity, and I've been told that my wages will not be subject to federal taxes. Is that true?

Answer: This is a really common misperception. According to the IRS, “United States citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside the United States.”

Now, that being said, some people may qualify for a Foreign Earned Income Exclusion. There are very specific rules to qualify, with all the normal IRS confusion. In order to avoid paying federal income taxes on your foreign earned income, you must:

• Have a foreign earned income (meaning your money must actually be earned and received for working in a foreign country);
• Have a tax home in a foreign country (meaning, the general area of your main place of business, employment or post of duty, regardless of where your family home is); and
• Meet the bona fide residence test or the physical presence test

As you can see, it is not as simple as just moving to a different country. There are a lot of rules and regulations, and you will likely still have to pay taxes in the country you move to. If you are seriously considering moving to a new country, speak with a qualified tax and finance professional, who is well versed in international tax laws. Relocating to a new country can be an exciting and rewarding experience, just don’t do it only for the hope of a tax break.

Question: Roni, I got divorced in October, will we still need to file a joint return since we were married for most of the year?

Answer: The way the IRS sees it, whatever your marital status as on December 31, that’s your marital status for the entire year. Since it sounds like your divorce was finalized in October, you would file single, or head of household if you qualify.

I’d like to add a word of caution: since you may have had some joint expenses and combined finances during 2010, I would highly recommend you work with a qualified tax professional to file your 2010 tax return. Splitting finances equitably after a divorce is difficult, so the guidance of a professional can be incredibly helpful.

Best of luck to you in your new life, and here’s wishing you a stress-free tax season!

Taxes & Divorce

Earlier today my team uploaded a new video to my YouTube channel. In the latest episode of our tax tips series, James and Edward discuss the tax implications of a divorce. You can watch the embedded clip below, or click here to check out my YouTube channel for other helpful videos.

Questions for the Tax Lady: October 11th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply. I will do my best to get an answer for you!

Question #1: Is it better, tax-wise, for married couples to divorce and cohabit, or is this an urban legend?

Answer: Ah, the marriage penalty, this myth continues to circulate even though it’s largely untrue. Years ago, if both spouses worked, it may have been more beneficial to be divorced and filing taxes separately.

However, years of tax adjustments have removed the marriage penalty from all but the most unique tax circumstances. By and large, the tax code allows married couples equal benefits to single people. For example, the standard deduction for filing single is $5,700. For a married couple filing jointly, the standard deduction is $11,400. Exactly double the amount for single.

Don’t go rushing to a divorce lawyer to save money on your taxes. If you really feel like filing jointly is costing you more money, talk to a tax professional and see if you would do any better by filing separately.

Question #2: I filed an automatic six month extension last April, but have not finished preparing my return yet. Is it possible to request another extension?

Answer: Unfortunately for you, the six-month extension is the end of the line, tax-wise. (Unless of course you are living out of the country). October 15 is the very last deadline before the IRS will start slapping you with failure to file penalties. If you are struggling with preparing your tax return, you may want to enlist the aid of a qualified tax professional.

My recommendation would be to do whatever it takes to get that return mailed or electronically submitted by midnight, October 15. Then immediately start getting ready for the next filing season so you can avoid this problem next year.

Questions for the Tax Lady: August 2nd, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I recently got divorced from my spouse and am required to make alimony payments. Can I deduct these funds on my federal tax return?

Yes, as long as you meet the IRS’ requirements you should be able to deduct alimony payments paid to a former spouse. To learn more about the alimony payment deduction, check out this article from the Roni Deutch Tax Center – Tax Help Blog.

Question #2: I had to pay late penalties to the IRS, can I deduct these expenses?

No. According to IRS.gov, interest and penalties paid to the IRS on federal taxes are not deductible.

N.Y. Judge Calls Husband's Pre-Divorce Filing of Back Taxes 'Despicable'

According to Law.com, a New York judge recently ruled that a taxpayer’s move to file amended returns claiming over $1.5 million of extra income on the day of his divorce trial was a malicious attempt to stop his wife from recovering marital assets.

"It is well settled that expenses (including unpaid taxes) incurred prior to the commencement of a divorce action constitute marital debt which, under normal circumstances, should be equally shared by the parties. However, in those rare instances where a party's conduct in creating a debt is so egregious, shocking, fraudulent or malicious, the Court can exercise its discretion and refuse to apportion the debt," Acting Supreme Court Justice Andrew A. Crecca wrote in Maria C. v. Dominick C., 04775/08.

"Under the facts and circumstances of this case," the judge concluded, "this is one of those rare instances."

The Dix Hills couple, whose names were redacted from the decision, were married in 1987 and had four children. The husband runs a home-improvement company, the wife worked "in the secretarial field," as Justice Crecca put it, until their first child was born.

The wife, Maria C., filed for divorce in 2008 on the ground of constructive abandonment. The judge found that the couple had not cohabited as husband and wife since January 2007 and that the husband had refused "to engage in marital relations."

Shortly before the divorce went to trial in March, the defendant-husband, Dominick C., unilaterally filed marital tax returns for the years 2004 through 2007.

In the amended returns, the husband admitted earning more than $1.6 million in unreported income over those four years.

The husband filed the returns on his own initiative, as the couple was not being audited or under investigation, and without his wife's signature. He included on the cover page a list of assets the government might consider attaching, including the couple's house. The husband stated the house's value ($1.2 million), the size of the mortgage and the name of the bank that held the loan.

The Tax Implications of Divorce

This morning a new entry explaining the tax implications of divorce was published on the Roni Deutch Tax Center – Tax Help Blog. As the article explains, our complicated tax system can often make stressful situations, such as a divorce, even more stressful. I have included a segment of the article below, but to learn more about the tax implications of divorce, check out the Roni Deutch Tax Center – Tax Help Blog.

Tax Filing Status

Even if you spent most of the year married to your partner, if you become legally divorced on or before December 31st, you will not be eligible to file a joint return. Therefore, if you are in the process of getting divorced, which will not finalize before the end of the year, you will need to file as a married taxpayer (either a joint or separate return). If you and your former spouse are on good terms, you should try to discuss tax planning as it related to your divorce. Additionally, if you are unmarried and your spouse was not a member of the household for at least six months of the year, and you have a qualifying dependent, you may be able to take advantage of the head of household filing status.

Child Custody and Tax Exemptions

If you had children with your ex-spouse then a whole new set of tax complications may emerge depending on the specifics of your child custody arrangements. If one parent is required to make child support payments, that parent will not be able to deduct the payments on a federal return. Additionally, child support payments are not considered taxable income for the parent receiving the payments. The parent has majority custody can also claim the children as dependents, and benefit from the resulting tax incentives.

Living Situation

A home is often the most expensive purchase a taxpayer will make in their lifetime, and can result in serious financial issues during a divorce. You and your former spouse will undoubtedly need to decide what to do with the property after the divorce is finalized. One ex-spouse may decide to continue living there, possibly with dependent children, or you may decide to sell the home and split the proceeds. If you do sell the home, and profit from the sale, then you will want to reinvest those funds within two years to avoid the capital gains tax.

Divorce and Attorney Fees

There is a small category of attorney fees may be deductible expenses on your tax return. For example, although, the legal fees for the divorce itself are not deductible, legal fees related to estate planning due to a divorce may be. To be on the safe side, you should ask your attorney to divide the bill into non-deductible charges, tax-deductible alimony charges, and property settlement charges. By doing this, we will be able to help your tax preparer have sufficient proof to claim the tax deductible fees on your return.

Continue Reading…

Dad Won't Pay For College, So Daughter Sues

When you read a headline saying a daughter is suing their parent for not paying their tuition, your first instinct is probably to laugh out loud. However, one Connecticut woman not only sued her Father for not paying her college tuition for her senior year, she also won! Read all the details in the NPR.org story below.

A woman in Connecticut sued her father for failing to pay her tuition for her senior year of college. She won.

Her dad had to pay $47,000, according to the Connecticut Law Tribune.

In a 2004 divorce, the father agreed to pay for the education of his three children. The daughter persuaded to him to sign a contract agreeing to pay for tuition as well as expenses such as books and car insurance.

The father paid for the first few years of the daughter's education at Southern Connecticut State University. But he refused to pay for her senior year, according to the article.

So the daughter took out a loan for $20,000 to pay for school, and sued her father for breach of contract.

The case went to trial. The father argued that the daughter failed to attend classes full time and didn't give him receipts for tuition other expenses. And, he argued, she dropped classes and kept the refunds for herself.

The judge didn't buy it. He ruled that the daughter "performed all of her obligations as set forth" in the contract, and that the father failed to prove his arguments.

The $47,000 payment includes the loan, interest, attorney fees and missed car insurance payments, the daughter's attorney told the Law Tribune.

Questions for the Tax Lady: March 22nd, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: My divorce was finalized in November of 2009. Since I was married for most of the year do my ex husband and I need to file a joint return?

No. As long as you were divorced before December 31^st, 2009 then the IRS considers you a single taxpayer for the whole year. You should therefore file an individual return.

Question #2: I have moved since I filed my last tax return. Is there a special form or something I should include with my new tax return to notify the IRS of the address change?

There is not really any need or specific protocol for notifying the IRS about a recent move. When you file your tax return just make sure you list your current address. The IRS will see the change, and automatically update their records.

The Ex-Wives Club of UBS Tax-Evaders

From the Wall Street Journal:

Let’s say you are a multimillionaire divorcee. You cleverly hid half your assets from your wife during the divorce settlement 10 years ago by stashing them in Switzerland.

So while she is scraping by on $20,000 a month in alimony, you are living large off the monthly cash flow from Zurich.

Now comes the UBS settlement, and the naming of the names.

An article in Time magazine quotes New York divorce lawyer Raoul Lionel Felder saying he is getting calls from multiple clients who want to know what they can do to get their share of the cash they suspect their ex–loved ones secreted away in Switzerland.

“You see allegations of Swiss bank accounts in divorce proceedings all the time,” says Felder, whose clients have included Rudy Giuliani and Robin Givens. “A lot of divorces are going to get opened up.”

And it doesn’t matter when the divorce took place. There is, apparently, no statute of limitations for divorce in most states, so even divorces of 30 years ago could be resurrected.

In Debt, Do They Part? Recession Delays Divorces

Yesterday I came across this interesting article from Philly.com discussing how more unhappy couples these days are deciding to stay together for financial reasons. According to the author, the recession has made it difficult for many couples that would like to file for divorce, but simply cannot afford to do so.

Breaking up is hard to do, but during a recession, it's even tougher.

Couples who want to split up often are handicapped: by the high cost of attorneys' fees, because they can't sell their homes or can't afford to set up two households.

So some of them are stuck living together - miserably.

"Some are agreeing to be roommates and stay at separate ends of the house," said attorney J.J. Dahl, who handles about 65 divorce cases each year. "And we have some who have gotten divorced and they're staying in the house together until the market improves and they can sell it."

This is new territory for Dahl, who says that none of her clients was doing this two or three years ago. But today, she finds that 25 percent of her clients are living together to make ends meet until they sell the house - and another quarter have given up and are losing their homes to foreclosure because they couldn't stand living together anymore.

Nationwide, the divorce rate appears to be the lowest since 1970, according to preliminary numbers from the National Center for Health Statistics.

"There is a lot of fear, so people are staying put," said Gary Nickelson, president of the American Academy of Matrimonial Lawyers. "People look at their assets and their liquidity, and they realize they don't have any."