Many divorce clients are looking for ways to restructure their finances so that they can move on with their lives with a clean financial slate. In this economy, that is tough going. From what I have seen, loan modification applications get “lost” more than is statistically appropriate and there is little chance of being forgiven or renegotiating just about anything when it comes to banks. 
In other words, “Bank Wins” is the norm. I could not have expressed what is going on in the world of bank loan remodifications better than the following article. See the link below for a great article to read in case you are thinking about a divorce which is based, in part, on some type of refinance/loan modification on your upside-down residence:
Why You Should Not Expect Your Bank to Voluntarily Rewrite Your Loan
January 4, 2012
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The Emotional Stages of Divorce
November 22, 2011Everyone reacts differently to divorce. Most people, however, go through similar stages, much like grief. Just like after the death of a loved one, it is common to move back and forth between the stages. The tough part for the divorce mediator is that client-couples are rarely in the same stage at the same time. 
When one party is ready to “get down to business”, while the other party is an emotional mess, it is the mediators job to slow the “ready” party down and allow the other party to catch up a little bit. It is important for both the husband and the wife to be able to keep up with the facts, information, proposals, etc., and to make sure that they are not too emotionally unstable to negotiate effectively.
Cathy Meyer, About.com Divorce News Editor, lists 6 emotional stages of divorce:
• Denial
• Shock
• Rollercoaster
• Bargaining
• Letting go
• Acceptance
For more detail about each stage please visit her article http://divorcesupport.about.com/od/copingandemotialissue/f/stagesofgreif.htm
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CHILDREN of DIVORCE: Do They Have Shaky Relationship Skills as Adults?
September 22, 2011
We all know that divorce can be a very traumatic time for the children who get caught in the middle. For years, though, there has been loud rumbling that “if mom and dad keep it friendly, everyone will be OK.” Is that true? Not really, say the experts. Though the damage may not appear in acting out behavior, plummeting grades or depression, you need only to look at your own children to see that children learn most about life – at least as far as their parents are concerned – by way of watching what the the parents do, not what they say. That should make it easy to see, then, that kids who live through a divorce are probably more likely, as adults, to experience their own divorce. Monkey-See, Monkey-Do.
According to Nicholas H. Wolfinger, in his book Understanding the Divorce Cycle: The Children of Divorce in their Own Marriages, there is clear statistical evidence that “divorce is transmissible from parents to children and that it continues, in many families, to cycle through generations.” “The crux of the idea”, says Wolfinger, “is that the family structure of origin powerfully affects marriage formation and marital stability in the adult offspring of divorce.” Wolfinger and colleagues found that:
Among adults whose parents had two or more failed marriages:
67% divorced, 26% two or more times.
Among adults whose parents divorced and remarried only once:
58% divorced, 19% at least twice.
Among adults raised in intact homes:
41% divorced, 9% two or more times.
What to do if you are contemplating or are in the middle of divorce? Try your best to use the divorce as a learning tool to help our kids develop mature, seasoned conflict resolution skills. Sound trite? Maybe. But, at least it will keep you focused on your kids and not your soon-to-be-ex-spouse’s idiot behavior and post-divorce financial blues. It will help you, too, blossom into the level-headed and child-centric negotiator that you need to be at this complex and emotional time.
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Divorce & Taxes Series: Part 3
September 16, 2011Tax Snippet #6 – Alimony (Spousal Support) has a Big Tax Affect; Child Support is a Wash. It’s boon and bust with alimony. Alimony is a boon to the payor, because it is deducted right off the front page of his/her 1040, thereby decreasing his/her Adjusted Gross Income (taxable income) by the amount of the alimony paid.3 Of course, that means that the receiver of alimony gets taxed on the money received, just as if it were ordinary income (like a salary).
In contrast, child support has no tax affect. It is not considered income to the recipient or a write-off for the payor. Instead, the IRS views the payment of child support simply as money spent for the support of one’s children – money that would have been spent on the kids whether or not there had been a divorce. Therefore, the payor does not get to take a deduction for child support (like he/she would have for alimony) since it is usual and ordinary for parents to support their children with post-tax dollars from their employment with little opportunity for write-offs, etc. Similarly, the recipient of child support does not have to categorize child support as income, for tax purposes, because child support is supposed to be used, as directly as possible, for the support of the kids and, of course, that money was already taxed at the payor’s end.
How does this matter to parents in the middle of a divorce situation? My experience is that it matters a great deal – or, perhaps, should matter a great deal — to many people. It can mean big dollars for some divorcing couples and is an excellent tool in the divorce settlement negotiator’s toolbox. Determining how to divvy-up support between the child and spousal support sides of the ledger can add civility to financial settlement negotiations. Why is that? Because a positive tax benefit to one parent does not necessarily create a negative tax burden to the other. It’s just does not always work that way. Do the math with your accountant, bring it to the table, and you may be able to allow both parents to walk away with something good in the deal.
The Tax benefits to the payor of spousal support may turn a spouse, who is otherwise emotionally resistant to the concept of alimony, into a willing participant. Many people do not like paying alimony. It rubs them the wrong way. A little massage by Uncle Sam, though, can turn that frown into a smile.
With all this negotiating over tax bennies and smacks, is the IRS standing by idly and waiting for your numbers to come in. Of course, not. Where there is play in the tax code, there is the taxman overseeing the game. Be aware that questions bearing on whether dollars sent from one household to the other, post-divorce, are actually “alimony” or “child support”, are usually answered with the IRS’s default: “Child Support”.
As long as a legal amount of child support is clearly being awarded in a divorce case (in Virginia and most other states there are statutory guidelines that must be met), the characterization of support as “alimony” or “child support” is often negotiated in divorce settlement talks. Be aware, however, as the IRS may not always agree with your and your ex-spouses characterization of support as “alimony” or “child support” regardless of how fair the two of you think the deal is. And, they are the boss when it comes to taxes. See Tax Snippet #7, below and, of course, your CPA, if there any questions on this slippery area of divorce tax.
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3A deduction is an exact dollar amount by which your gross income (income that is taxable) is reduced. In other words, deductions lower the final amount of income that Uncle Sam can tax. After subtracting deductions from gross salary (page 1 of your Federal Tax Return – Form 1040), the dollar amount remaining is referred to as your Adjusted Gross Income. (Other deductions include IRA deductions, certain educator expenses, health savings account contributions, student loan interest, moving expenses, and a few others.) Deductions are not the same as credits. Credits are taken off the top of what you would have owed to the IRS if you did not have the credits. Credits do not lower your taxable incomes. Instead, they lower the actual tax bill owed to Uncle Sam. (Page 2 of your 1040) The IRS allows, as credits, certain child and dependent care expenses, the child tax credit, residential energy credits, and a few others.) To further confuse you, the Fed’s also have one more deduction that has a different name: Exemptions. Exemptions (page 1 & 2 of your 1040) include the tax breaks you receive for: (a) just being a human being and; (b) for the other human beings who are your dependents (children, dependent relatives).
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Tax Snippet #7 – Don’t Mess with the IRS when it comes to Labeling Support as “Child Support” or “Alimony”. Many parents feel that the minimum guidelines for child support in their state could not possibly meet their child’s needs, but the tax affect of child support (being a wash) does not sit well with the payor. In these cases, divorcing couples often negotiate a division in the characterization of support into both camps: The Minimum Statutory Guidelines Amount = Child Support; The rest of the Support Money = Spousal Support. This can often work well, financially, for divorced parents. Beware, however, that the IRS does not always go along with parents’ tax planning decisions.
In particular, divorcing parents need to be careful where a big change in the amount of alimony is automatically triggered around the time (within 6 months) of a major event in a child’s life (such as graduation from high school). In those cases, the IRS may very well re-characterize those alimony payments as child support and come looking for the payor to pony up. Remember: Don’t mess with the IRS. See your CPA and your divorce attorney.
These Tax Snippets are written based on my observations and experience. I am and not a CPA, tax planner or tax attorney. I am a mediator and former family law attorney. These are, however, some of the key issues that I see over and over again with my clients. This series of articles is intended to help you “get your feet wet” in this mucky area of divorce. If you think any of these issues might affect you, see your tax professional for up-to-the-minute and personally-tailored tax advice.
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Divorce & Taxes Series: Part 2
September 11, 2011
Tax Snippet #3 – The Exemption for a Dependent – Who Gets to Keep It? The IRS will, in most circumstances, dub the person with whom the child lives the majority of the time as “The Custodial Parent”. This is true unless your settlement agreement and/or divorce decree clearly states otherwise, e.g. one parent is officially named the “primary custodian”.2 Why is it important, for tax purposes, which parent the IRS views as the “custodial parent”? Because, the custodial parent, by default, gets to keep the child exemption for a dependent child – a good savings for most people.
What happens if your settlement agreement/divorce decree states that custody be “shared equally” by the parents? Confusion and trouble, if you don’t make some decisions. To help in these situations, the IRS has implemented default criteria to determine who, in fact, is the “custodial parent”. The IRS looks at whether:
- Your child is under age 19 at the end of the year (or under age 24 at the end of the year if a full-time student);
- Your child has lived with you for more than half the year;
and
- Your child has provided less than half of his/her support for the year.
The trouble comes when two taxpayers meet all of the criteria above and their settlement agreement/divorce decree is silent as to which parent gets the dependency deduction. What to do? The IRS has made a tiebreaker for these circumstances:
- The custodial parent is the one with whom the child spent the most number of nights in the tax year in question.
But, what if the parents truly shared time with their child (ren) on a 50-50% basis?
- The IRS will grant custodial parent status on the parent who has the highest adjusted gross income.
Is the dependent child deduction “bargainable”? Yes. Some people trade off the exemption (every other year), some split up the children (e.g., dad takes the boy, mom takes the girl), some negotiate the deduction in exchange for something else of value, and some couples (smart ones) go to an accountant to see what the true benefit would be to each of them before making proposals and engaging in negotiations regarding the dependent child exemption.
As of this writing, the IRS requires the custodial parent to complete and sign IRS Form 8332 and have it attached to their and the other parent’s tax return if the primary custodian is giving away her/his right to the deduction. (This has not always been the case and you should check on the rules each and every year that you file your taxes to see what the IRS has cooked up on this one.
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2Of course, if your child’s living situation directly contradicts your divorce paperwork, this can create lots of problems and you may want to consider renegotiating your written parenting arrangements sooner rather than later.
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Tax Snippet #4 – Head of Household. Somewhere in between “married”, “married filing separately” and “single” is the divorced taxpayers’ best friend: “head of household” status. What is that? Filing as “head of household” usually nets you:
- A lower tax rate than if you claim a filing status of single or married filing separately;
- Allows more liberal income limits before the IRS puts a damper on your child tax credit (same for retirement account contributions);
- You may be able, if you are still married, to claim certain credits (such as the dependent care credit and the earned income credit) that you cannot claim if your filing status is married filing separately;
and
- It increases the income limits that reduce your child tax credits.
You must meet the following criteria to be eligible to file as “head of household”:
- You file a separate return (if you are still married);
- Your spouse did not live in your home during the last 6 months of the year (whether or not you are yet divorced);
- You paid over half the cost of keeping up your main residence;
- You qualify to claim your children as dependents (whether or not you have kept or given away the dependency deduction to the other parent); and
- Your home was the main home of your child for more than half the year.
These Tax Snippets are written based on my observations and experience. I am and not a CPA, tax planner or tax attorney. I am a mediator and former family law attorney. These are, however, some of the key issues that I see over and over again with my clients. This series of articles is intended to help you “get your feet wet” in this mucky area of divorce. If you think any of these issues might affect you, see your tax professional for up-to-the-minute and personally-tailored tax advice.
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Divorce & Taxes Series: Part 1
September 7, 2011The thought of taxes is stressful enough, let alone when divorce becomes a factor. To help you sort through this wildly misunderstood area of divorce financial planning, I will be posting several “Tax Snippets” over the next several days.
These Tax Snippets are written based on my observations and experience. I am and not a CPA, tax planner or tax attorney. I am a mediator and former family law attorney. These are, however, some of the key issues that I see over and over again with my clients. This series of articles is intended to help you “get your feet wet” in this mucky area of divorce. If you think any of these issues might affect you, see your tax professional for up-to-the-minute and personally tailored tax advice.
Tax Snippet #1 – Filing Status Your filing status is a defining factor in determining your tax bracket. Tax status is dependent on (1) your marital status, and (2) your parenting arrangements (if you have dependent children). The choices are, in order of preference for most people (i.e., greatest tax advantages):
- Married Filing Jointly
- Head of Household (see “Tax Snippet #4)
- Single
- Married Filing Separately
Determining – and often times actively choosing — your tax status is very important. The percentage of tax that you pay to Uncle Sam on your Adjusted Gross Income1 — 10 to 35% (with some exceptions) — is determined by your tax bracket.
Your tax status is determined on December 31st of that tax year. Period. It has nothing to do with April 15 or any other factors. In other words, if you are divorced on or before December 31, you only have the tax status choices that single people have (single, head of household). You lose the tax advantages that “married filing jointly” might offer for that tax year.
Don’t panic, though, if you are still married on December 31, but your spouse refuses to file with you or, on the other hand, if you decide that you don’t want to file with him/her for your own reasons. If you are the main residential caretaker of your child(ren), there may be a less expensive way to present yourself to the IRS than as a “married filing separate” or “single”. The IRS calls this “Head of Household” status.
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1Definition of Adjusted Gross Income (AGI): Your AGI is your gross, or total, income from taxable sources minus certain deductions. Income includes salary and other employment income, interest and dividends, and long- and short-term capital gains and losses. Deductions include some unreimbursed business and medical expenses, contributions to a deductible individual retirement account (IRA), and alimony you pay. Your AGI serves as the basis for calculating the income tax you owe. (See page one of your federal tax return.) Your AGI is then used to establish your eligibility for certain tax or financial benefits, such as deduction of your IRA contribution or qualifying tax credits (such as the child tax credit and the earned income credit).
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Tax Snippet #2 – Tax Advantages for Parents Lots of divorcing people get confused when it comes to the tax benefits of having children. That is because, when they were married and raising children under the same roof, the tax benefits allowed were clear. Upon divorce, however, the rules get very confusing. Some of the key tax benefits of having children become “negotiable” upon divorce. It is important for you and your soon-to-be-ex to figure out how your tax reality and your parenting arrangements relate to and affect on another. Here are the key points to consider:
(1) The Dependent Child Exemption (a deduction): Every member of a household potentially counts toward a tax-deductible exemption on the family tax return. In 2011, each exemption will equate to a $3,700 deduction. So, if you are single and claim the exemptions for 2 kids, you have 3 exemptions totaling $11,100 in deductions. Whether or not you may claim your child(ren) as a dependent for purposes of utilizing the exemption is a point of negotiation in divorce settlements. The primary residence of the child(ren) does not necessarily have to determine who can claim the child(ren) on their federal tax returns and custodial parents can give away the right to claim the child(ren) as dependents by completing IRS Form 8332. (See your CPA for up-to-the-minute details.)
(2) Other IRS Benefits to Parent Claiming Dependent Exemption(s): The party who claims the child(ren) as a dependent on his/her tax return (whether by default or pursuant to agreement and the completion of IRS Form 8332) is also the only parent eligible for other IRS benefits including, but not limited to:
- The Child Tax Credit: $1,000 per child, under the age of 17, with gradually reduced phase-outs that start at the following income levels: $55,000 for married couples filing separately, $75,000 for single and head of household filers and $110,000 for married couples filing jointly. In the phase-out range, the child tax credit is reduced by $50 for each $1,000 of income above these threshold amounts.
- Certain College and Educational Credits: In 2010, there were two tax credits that apply to education: The American Opportunity Credit (which replaced the Hope Credit) and the Lifetime Learning Credit. The American Opportunity Credit is worth up to $2,500 for each qualifying student, and is available during the first four years of postsecondary education. The credit is phased out for taxpayers with adjusted gross incomes (taxable income “AGI” ) starting at $60,000 for single filers and $120,000 for joint filers. The Lifetime Learning Credit is 20% of the first $10,000 you paid for qualifying tuition and related expenses each year. The maximum credit for 2010 was $2,000. Unlike the American Opportunity Credit, there is no limit on the number of years that this credit can be claimed; however, it is subject to the same AGI income phase rules as the American Opportunity Credit.
(3) Tax Benefits to the Primary Custodian (only!), regardless of who claims the exemption(s):
- The Child & Dependent Care Deduction: If you paid someone to care for a child or a dependent so you could work, you may be able to reduce your federal income tax by claiming the Credit for Child and Dependent Care expenses on your tax return. This Credit is available to people who, in order to work or to look for work, have to pay for child care services for dependents under age 13. The Credit is also available if you paid for the care of a spouse or a dependent of any age who is physically or mentally incapable of self-care. This federal tax credit can be worth up to 20-35% percent of the cost of day care (depending on your Adjusted Gross Income).
- The Exclusion for Dependent Care Benefits: If your employer provides dependent care benefits on a qualified plan, you may be able to exclude those benefits from your taxable income.
- The Earned Income Credit: This is a refundable tax credit that is given to qualified, modest-income taxpayers who have at least one child living at home. The credit begins to phase out at $21,420 for married taxpayers filing a joint return with children and completely phases out at $40,463 for one child, $45,295 for two children and $48,279 for three or more children. For married taxpayers filing a joint return with no children, the credit begins to phase out at $12,470 and completely phases out at $18,440.
- Right to File as “Head of Household”: Filing taxes as “Head of Household” is also wholly dependent on which parent is considered the “primary custodian”, and IRS Form 8332 has no affect on this privilege. (See Tax Snippet # 4)
The thought of taxes is stressful enough, let alone when divorce becomes a factor. To help you sort through this wildly misunderstood area of divorce financial planning, I will be posting several “Tax Snippets” over the next several days.
These Tax Snippets are written based on my observations and experience. I am and not a CPA, tax planner or tax attorney. I am a mediator and former family law attorney. These are, however, some of the key issues that I see over and over again with my clients. This series of articles is intended to help you “get your feet wet” in this mucky area of divorce. If you think any of these issues might affect you, see your tax professional for up-to-the-minute and personally-tailored tax advice.
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Divorce Mediation as Affordable Alternative to Divorce Lawyer Settlements
November 15, 2010
Simply put, mediation is much less expensive than litigation. For starters, there is only one mediator per couple (versus two lawyers, in a litigated case). This “one-fee versus two-fees” can add up very quickly. Then, there is the question of the hourly fee for divorce mediators versus divorce lawyers. In the Fairfax and Northern Virginia area, divorce attorneys usually cost between $300-$500 and hour. Mediators often charge significantly less. At Graine Mediation, we charge $235 per hour. Why do we charge less than litigators? Simply put, because our job is much more streamlined. We focus on one thing: To help divorcing couples reach a mutually agreeable and long-lasting solution to their divorce disputes. No expensive, complex and inflammatory strategies — that require a lot of time and preparation by divorce attorneys — are employed. Mediators help couples learn to communicate at least well enough to settle their divorce disputes and get through the years of co-parenting that often lie ahead for divorced people. Good divorce mediators know the law and are good at helping couples understand those areas of the law and legal trends at least well enough to make rational, sensible decisions in their divorce settlements. Couples make their own decisions based on the information given and a thorough understanding of the facts and issues in their case. Mediators do not give legal advice, but they help couples stay within the reality of the legal divorce culture in which they live. “Winning” in a divorce is usually very expensive because the courts, at least in Fairfax and Northern Virginia, tend to work very hard to be fair and impartial. This makes it difficult for lawyers to “win”. From the perspective of this divorce mediator, after the money is spent on attorney-driven settlement negotiations, the division of assets & debts, support and the custody and visitation of the children is not wildly divergent from what the couple could have negotiated on their own with the assistance of a trained divorce mediator. Check out http://www.grainemediation.com/faq-fees-costs-comparison.html for a more detailed comparison of divorce mediation and litigation.
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Fairfax VA Divorce Mediator 