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Divorce irs attorney

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									  Divorce
Tax & Financial
Considerations


                  Kathey Hickey Fulham, CPA
                  www.KatheyFulhamCPA.com
       Divorce & Taxes
•   The importance of tax-related issues
     in planning & structuring a divorce
•   To maximize assets
•   Realize potential tax savings
•   Separating & divorcing couples need
    to take a close look at key issues


                                 Kathey Hickey Fulham, CPA
                                 www. KatheyFulhamCPA.com
               Key Issues
•   Deductibility of alimony payments
•   Claiming dependency exemptions
•   Sale of the marital home
•   Division of marital assets
•   Tax basis of marital assets
•   Social Security
•   Investment Accounts
•   Children
•   Medical Insurance
•   Life Insurance
                           DivorceNet




                                        Kathey Hickey Fulham, CPA
                                        www. KatheyFulhamCPA.com
                 Factoids about divorce
• Each year nearly 2.8 million go through the emotional
  and financial trauma of divorce.1

• Average length of a marriage that ends in divorce is
  less than ten years.1
• Average cost of divorce is $15,000 2

• Average length of divorce proceedings is 1 year. 2

•   1   ABCs of Divorce for Women, Carol Ann Wilson and Ginita Wall, 2003

•   2 Smartmoney.com May 2002




                                                                            Kathey Hickey Fulham, CPA
                                                                            www. KatheyFulhamCPA.com
        Factoids about Divorce
         Length of marriages

• Median duration of 1st marriages that
  end in divorce
  – Males: 7.8 years
  – Females: 7.9 years
• Median duration of second marriages
  that end in divorce
  – Males: 7.3 years
  – Females: 6.8 years
               Source: Divorce Magazine.com, US Divorce Statistics, 2002




                                                                   Kathey Hickey Fulham, CPA
                                                                   www. KatheyFulhamCPA.com
Special considerations for women in
              divorce
• In the 1st year after a divorce,
   the wife’s standard of living drops by 27%
   while the husband’s increases by as much as 10%
       ABCs of Divorce for Women, Carol Ann Wilson & Ginita Wall, 2003




• Factors attributable to lower women’s standards:
   – “Care of children more than child support
   – Demands of motherhood prevent many women from pursuing high-
     powered careers”

• 21% of recently divorced women are living below the
  poverty line compared to only 9% of men
                                     Census Bureau




                                                                         Kathey Hickey Fulham, CPA
                                                                         www. KatheyFulhamCPA.com
    Special considerations for women in
                  divorce
• In 2003, the average monthly Social Security benefit
  of a retired man was $1,008
  but only $774 for a retired woman Seniors-site.com 2004

• 74% of women are single when they pass away
    Philadelphia Inquirer, March 5, 2001




• Women tend to invest more conservatively than men,
              receiving lower rates of return from their
              investments over time
•                       US Department of Labor, Women and Retirement Savings www.dol.gov/ebsa




                                                                                    Kathey Hickey Fulham, CPA
                                                                                    www. KatheyFulhamCPA.com
           Tax Filing Status
• Filing status is determined
  on the last day of the tax year-
  December 31st
If still legally married at the end of the year:
Options:
Married Filing Jointly
Married Filing Separately

Head of Household ****** Only when certain circumstances are met
  DO NOT USE Head of Household unless you meet all the requirements.
  Speak to a tax professional first!



                                                             Kathey Hickey Fulham, CPA
                                                             www. KatheyFulhamCPA.com
                Filing Status
                    Single

• Taxpayer is single if
  – Unmarried
  – Separated from a spouse
  Either by
    Divorce or
    Separate maintenance decree, on December 31st
  A widow(er) whose spouse died before 2006 unless
  He/she meets tests for qualifying widow(er)


                                        Kathey Hickey Fulham, CPA
                                        www. KatheyFulhamCPA.com
              Filing Status
           Married Filing Jointly

If on the last day of the tax year
  – Married living together
  – Married and living apart
     But not legally separated or divorced
  – Separately under an interlocutory (not final)
    divorce decree, or
  – Living in a common-law marriage
     • (not recognized in State of MA)
  – If one spouse died in 2006, the survivor can file
    jointly if the survivor did not remarry in 2006


                                             Kathey Hickey Fulham, CPA
                                             www. KatheyFulhamCPA.com
       Head of Household (HOH)

Qualify to file HOH-the taxpayer must all
  of the tests:
  1.   Taxpayer is not married at year end **(see test of “considered
       unmarried” on next slide
  2.   Taxpayer paid > half the cost of keeping home
  3.   Home was principal residence > ½ year of either:
       – Taxpayer’s qualifying child or
       – Taxpayer’s qualifying relative who is the taxpayer’s dependent
          (but not if person is unrelated to the taxpayer or qualifying
          relative by reason of multiple support agreement (see 1040
          Quickfinder)
  4.   The taxpayer is a U.S. Citizen or resident during the entire year.


                                                          Kathey Hickey Fulham, CPA
                                                          www. KatheyFulhamCPA.com
         Head of Household
       “Considered Unmarried”
A married taxpayer can file as HOH
      if all of the following tests are met.
1. Taxpayer files a separate return
2. Taxpayer paid> ½ cost of keeping up home for tax
   year
3. Spouse did not live in home during last 6 months
   of tax year
4. Taxpayer’s home was the main home >1/2 the
   year of a child, step-child, adopted or foster child.
   Child must be dependent unless child’s custodial
   parent is allowed the exemption under a decree,
   agreement of release of exemption.


                                           Kathey Hickey Fulham, CPA
                                           www. KatheyFulhamCPA.com
      House of Household

Costs of keeping up a home for the year
• Property taxes
• Mortgage interest expense
• Rent
• Utility charges
• Property insurance
• Food consumed on the premises
• Other Household expense


                                   Kathey Hickey Fulham, CPA
                                   www. KatheyFulhamCPA.com
               Dependents
              Qualifying Child

1. be taxpayer’s child, brother, sister, etc
2. Be either < age 19
     full-time student < age 24     or
     any age if totally or permanently disabled
3. Have lived with the taxpayer > ½ the year
4. Not have provided> ½ his or her own support
5. Not be a claimed a qualifying child or another
   taxpayer with higher priority under the tie-
   beaker rules.


                                       Kathey Hickey Fulham, CPA
                                       www. KatheyFulhamCPA.com
           Alimony
• Is treated as taxable income
   for the receiving spouse

• Is a deductible expense
    for payor spouse

                            Kathey Hickey Fulham, CPA
                            www. KatheyFulhamCPA.com
Child Support Payments
• Not taxable to
  Receiving spouse

• Not deductible to
  Payor spouse

                      Kathey Hickey Fulham, CPA
                      www. KatheyFulhamCPA.com
  Dependency Exemption For
           Children
        after Divorce?
• The custodial parent
  generally is entitled to the
  dependency exemption when
  filing income taxes

                          Kathey Hickey Fulham, CPA
                          www. KatheyFulhamCPA.com
     Dependency Exemption

• However, if it is negotiated in the
  divorce settlement in writing,
  the non-custodial parent can take the
  deduction

• IRS Form 8332-Release of Dependency
  Exemption –do it one year at a time.

                                Kathey Hickey Fulham, CPA
                                www. KatheyFulhamCPA.com
  Keeping Property Settlements Tax
               Free
• Property transfer resulting from a transfer between
  husband and wife or former spouses generally
   – No gain or loss is recognized by either spouse
   If “Incident to Divorce”
   – Transfer occurs within one year after the marriage ends
       (divorce)
   – Transfer related t
   – o the ending of the marriage-within 6 years (presumed to
     related to ending of marriage.


   Tax basis and holding period of the property transfers.




                                                             Kathey Hickey Fulham, CPA
                                                             www. KatheyFulhamCPA.com
          Divorce settlement

The family home
• Sell it
• Stay in it
   Can you afford to maintain the home
    after the divorce?

• Consider sale of residence exclusion rules.


                                      Kathey Hickey Fulham, CPA
                                      www. KatheyFulhamCPA.com
 Sale of Residence Exclusion Rules

• A taxpayer can exclude $250,000 gain
  (married couples $500,000 ) if:
• If taxpayer owned & used the home as
  a principal residence for at least 2 out of
  5 years prior to the sale.
• (both joint filers must have used it 2 of 5)
• Frequency: only once in 2 years.


                                                 Kathey Hickey Fulham, CPA
                                                 www. KatheyFulhamCPA.com
Kathey Hickey Fulham, CPA
www. KatheyFulhamCPA.com
                                        QDROs

• Qualified Domestic Relations Order
  is a judgment, decrees or court ordered under a
  domestic relations order.
Tax Effects:
  Benefits paid to a spouse or former spouse are
  included in spouse’s income
10% Penalty does not apply:
to a early distribution made pursuant to a QDRO. This
  exception to the penalty tax applies whether the alternate payee is the spouse, former spouse, child or
  other dependent of the plan participant.

QDROs do NOT apply to IRAs

                                                                                        Kathey Hickey Fulham, CPA
                                                                                        www. KatheyFulhamCPA.com
              Social Security


• Eligibility for benefits
  – At least 10 years of marriage
  – At least 62 years old
  – Not married
  – Former spouse must be entitled to benefits
  – Benefits must not exceed one-half of the
    former spouse’s benefit
                             Evergreen Investments




                                                     Kathey Hickey Fulham, CPA
                                                     www. KatheyFulhamCPA.com
   Benefits of staying in control

• You’ll end up with:
  – Better relationship with your former spouse
  – Better settlement
  – Save money
  – Save time
  – Get through it with less pain



                                     Kathey Hickey Fulham, CPA
                                     www. KatheyFulhamCPA.com
     Divorce Settlement Issues
             Children


• Child support payments

• Education planning
        College Tuition-who will fund tuition payments?




                                             Kathey Hickey Fulham, CPA
                                             www. KatheyFulhamCPA.com
        Education Tax Credits

Eligible Student & Dependents
  1. The taxpayer
  2. Taxpayer’s spouse or
  3. A dependent for whom the taxpayer claims a
     dependency exemption (i.e. a “claimed
     dependent”)

  The Hope Scholarship
  Lifetime Learning Credit
  (also Deducting Qualified Tuition)

                                         Kathey Hickey Fulham, CPA
                                         www. KatheyFulhamCPA.com
                 Education Credits
•    Qualified college or vocation school
     expenses.
•    Phase out if modified adjusted gross income
    $90,000-$110,000 MFJ
    $45,000-$55,000 Single, HOH, QW

    QUALIFIED EXPENSES:
    Tuition & fees required for the enrollment or attendance of a student
         at an eligible educational institution.
    Fees other than tuition are included only if the fees MUST be paid to
         the institution as a condition of enrollment or attendance.
    Not include: room, board, insurance, medical expenses,
         transportation
    Books, supplies & equipment unless required to be purchased from
         the educational institution



                                                           Kathey Hickey Fulham, CPA
                                                           www. KatheyFulhamCPA.com
                 Tuition Credits

• Hope Scholarship Credit
  – Can only be used for the first two years per student
  – It can not be used if the student has completed two years of
    higher education before beginning of the tax year
  Up to $1650 per student (2006 amounts)
  – Non refundable credit of
      • 100% of $1,100
      • 50% of next $1,100
      The credit is per student per year. A family may have more than
        one eligible student in a year.




                                                        Kathey Hickey Fulham, CPA
                                                        www. KatheyFulhamCPA.com
              Tuition Credits

• Lifetime Learning Credit
  – Both degree and non degree courses eligible.
  – Credit is not workload-based.

  – 20% first $10,000 of expenses per return.
    Maximum credit is $2,000

  – Credit does not vary based upon # of students
  – Unlimited number of years.

                                          Kathey Hickey Fulham, CPA
                                          www. KatheyFulhamCPA.com
                Child Tax Credits

• Taxpayers with qualifying children under age
  17.
• Up to $1,000 per child

• Phase –out begins at modified AGI over
   – $110,000 MFJ
   – $75,000 Single, HOH and QW
   – $55,000 MFS
  Generally, nonrefundable



                                     Kathey Hickey Fulham, CPA
                                     www. KatheyFulhamCPA.com
  Child &Dependent Care Credit

• Day care expenses for dependent(s)
  under age 13 or incapacitated
• That allow taxpayer to work or look for
  work.

• 20% to 30% of qualified expenses
  depending on AGI level.

                                  Kathey Hickey Fulham, CPA
                                  www. KatheyFulhamCPA.com
   Additional Child Tax Credit

• Taxpayers who don’t claim full $1,000 tax
  credit for each child and
• Have one or more qualifying children and
• Over $11,300 of earned income or
• Three of more qualifying children
• Up to $1,000 per child
• Partially refundable.


                                      Kathey Hickey Fulham, CPA
                                      www. KatheyFulhamCPA.com
               Earned Income Credit

•    Working families with this many
     children
•    One: AGI < #32,001 ($34,001 if MFJ)
    – Max. credit $2,747 for one child
•    Two or more: AGI<$36,348 ($38,348 MFJ)
      -$4,536 for two children
•    None, AGI ,$12,120 ($14,120 if MFJ)
       -$412 for no children
2006 amounts


                                         Kathey Hickey Fulham, CPA
                                         www. KatheyFulhamCPA.com
     Estimate Your Post-Divorce
          Living Expenses

• Figure out how much it will cost you to
  live after divorce.
• This number is especially important for
  the spouse who is planning to remain in
  the marital home.
• You may find out that you can not afford
  to stay in the home. You need to know
  this ahead of time!

                                 Kathey Hickey Fulham, CPA
                                 www. KatheyFulhamCPA.com
 Mistakes People Make Most Often
#1-Giving up control of your divorce
#2-Dividing up property without a thorough
    inventory -before you begin negotiating:
    you must know –what you own & what you
    owe
#3 Spending too much time & money letting
    lawyers gather information
#4 Letting family & friends tell you what you
    need
#5 Not paying enough attention to taxes
#6 Trying to win their spouse back being
    generous        Divorceinfo.com
                                      Kathey Hickey Fulham, CPA
                                      www. KatheyFulhamCPA.com
             Mistake #5-Taxes
• People negotiate
• Reach agreement
• Get divorce
  without understanding the tax impact of concessions
  they are making     Divorceinfo.com




Be Proactive
 know the tax consequences BEFORE
 you make any concessions
You win if you have the answers before you negotiate a settlement
Have a poker face…. Don’t show your hand before you play it!
Talk to a tax professional before you make any decisions

                                                     Kathey Hickey Fulham, CPA
                                                     www. KatheyFulhamCPA.com
 How much will it cost?
• It depends on
  – where you are
  – how much conflict you have with your
      spouse
  – how you do it
  – How complex your affairs are
  – Most importantly:
   it depends on whether you stay in control


                                     Kathey Hickey Fulham, CPA
                                     www. KatheyFulhamCPA.com
  Tips on saving time & money

• Gather documents in a “divorce”
  box- “financial preparation kit”
• Copy documents for attorney
    So you always have a copy
  Outline questions before the
  meeting & stick to your list.
 Time is money!!!!!!!!!!!!!
                              Kathey Hickey Fulham, CPA
                              www. KatheyFulhamCPA.com
    Estimating Living expenses

• Add living expenses & monthly debts

• Subtract this from your after-tax monthly
  income.

• Do you have any disposable income?


                                  Kathey Hickey Fulham, CPA
                                  www. KatheyFulhamCPA.com
        Planning After Divorce

•   Creating a budget
•   Saving strategies
•   Education funding
•   Retirement planning
          »               Evergreen Investments




                                                  Kathey Hickey Fulham, CPA
                                                  www. KatheyFulhamCPA.com
                         Conclusion
• No matter how intelligent a person , when going
  through a divorce, a person will not always make the
  best decision under stress.
• “Decision-making is often controlled more by emotion
  than by rational thought
• Potential tax pitfalls associated with divorce are
  abundant
• It is crucial for each spouse to analyze possible tax
  issues in making their decisions during this difficult
  time”     DivorceNet




Thank you
Kathey Hickey Fulham      508-420-3456


                                             Kathey Hickey Fulham, CPA
                                             www. KatheyFulhamCPA.com
      The Adventure Attitude
                by Alan Hobson (Attitude, 1993)
              Know your values. Know yourself.
                  Dare to dream. Dream big.
Don’t concern yourself with money, material wealth, security,
                 fame, fortune, power or position
  Do concern yourself with contentment, self-satisfaction
             freedom, independence and happiness
  Decide on your dream. Know why it is important to you.
              Assess the risks. Develop a plan.
   Step out from the crowd. Cultivate courage; fight fear.
  Learn through experience, Experience through learning.
   Display tenacity, focus ferociously, endure endlessly.
              Forget failure; remember resolve.
            Adapt endlessly; react instinctively.
        Push through the pain; parade past skeptics.
          Wonder at the world; wander its heights.
           Be enthusiastic, persistent and tough
                 Being driven is not enough.
 Turn obstacles into opportunities, failures into successes.
                disappointments into direction.
                   Never doubt the dream
           Be ultimately accountable to yourself.
            Be ultimately appreciative of others.

                                                                Kathey Hickey Fulham, CPA
                                                                www. KatheyFulhamCPA.com

								
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