Is My Spouse Really Hiding Money . . . or Does It Just Feel That Way?

January 22, 2012

Unfortunately, it happens.  Spouses do conceal assets.  Some even spend the entire marital estate on untoward activities and ridiculous whims and weird mid-life crisis expenditures. Some spouses even run up huge debts without telling their husband or wife – especially if these debts are from gambling, drugs, girlfriend-related expenses, etc. It happens, but you should not assume, in every case, that this is what is going on.

Divorce attorneys and forensic accountants are the masters at figuring this out.  Husbands and wives who feel that they are being hoodwinked, when it comes to the family finances, need an attorney who has subpoena powers and the ability to take the equivocator (pretty much means “the liar”!) to court if he/she fails to produce the financial documents as requested.  A litigator’s toolbox and skills are also needed if a spouse repeatedly and inadequately explains why money is “missing”, why debts have mysteriously piled up, why the suggested values of the parties’ businesses and property are so much lower than expected and/or why there are suddenly expensive assets that both appear and disappear. Be careful, however, as this is an area of litigation where the fees can add up fast and, if the money is truly gone, it is just that: “Gone!” There may be other assets to offset the missing money, etc., but if there is not, you may be spending and awful lot of time and money just to prove it. Talk with your attorney, have a goal and consider capping your attorney fees at a certain dollar amount.

Be careful, however, when aligning oneself to the notion that your spouse is being shady with the family estate.  In today’s volatile economy, what may appear to be financial shenanigans may very well just be the manifestation of the sad truth that a spouse’s business is going downhill.  Also, the values of property and business are remarkably difficult to assess these days.  Not only that, but the old adage that “the value of a business or piece of real estate is only what a person would pay for it” has never been truer than in today’s market.

Sometimes, small suspicions of asset concealment and/or debts that seem to have accumulated out of no where, are often simply a manifestation of miscommunications, misunderstandings and a lack of knowledge about the family’s money situation by one of the spouses.  A good mediator can help clients to determine the difference between a case of “hiding the goods” and a case where there is simply a very uneven base of knowledge about the family assets and debts. The former is usually a cause for a referral to the court-based system; the latter is a situation where mediation is often the perfect forum to help both parties get a grip on their financial situation as part of the settlement of their divorce disputes.

The following list includes some common ways in which a spouse may hide, undervalue or disguise marital assets[1].

Disguising Marital Assets as Method of Hiding Assets

  • Antiques, artwork, hobby equipment, gun collections, and tools that are overlooked or undervalued. Look for antique furnishings, original paintings, or collector-level carpets in your spouse’s office.
  • Cash kept in the form of cash/travelers’ checks. You may be able to find these by tracing bank account deposits and withdrawals.
  • A custodial account set up in the name of a child, using the child’s Social Security number.
  • Investment in certificate “bearer” municipal bonds or Series EE Savings Bonds. These do not appear on account statements because they are not registered with the IRS. (The government is phasing out these bonds.)

Not Reporting Receipt of Money on Tax Returns, Delaying Receipt of Marital Money

  • Income that is unreported on tax returns and financial statements.
  • Collusion with an employer to delay bonuses, stock options, or raises until a time when the asset or income would be considered separate property (upon separation in Virginia; upon divorce in Maryland and Virginia)
  • Debt repayment to a friend for a phony debt.

Misappropriation of Marital Money

  • Expenses paid for a girlfriend or boyfriend, such as gifts, travel, rent, or tuition for college or classes.
  • Retirement accounts that your spouse never tells you about.

In addition, business owners may try to hide assets in the following ways:

  • Skimming cash from the business;
  • Salary payments to a nonexistent employee, with checks that will be voided after the divorce;
  • Money paid from the business to someone close — such as a father, mother, girlfriend, or boyfriend — for services that were never actually rendered (the money is given back to your spouse after the divorce is final); or
  • A delay in signing long-term business contracts until after the divorce.

If you are planning on filing for divorce, it would be a good idea to begin getting yourself educated as to the family finances.  If you do not think that there are a lot of games being played with the money, and if you are able to sit down with your spouse, you will want to start informing each other of:

  • the location and values of all assets;
  • your family’s spending patterns;
  • the costs of health insurance for family members;
  • job potentials for each of you (if necessary, post divorce);
  • impending big expenses; and,
  • your family’s debt situation . . .

. . . more power to you. Get to it!

But, if you need the help of a third party to get things moving along, this is a great use of a mediator’s expertise.  Mediators are trained in both helping divorcing couples communicate (without screaming!) and in helping them sort through the family finances and begin planning for their futures as they become financially independent from one another.

Remember, the family CPA, banker, money manager/broker and estate planning attorney has a fiduciary duty (duty of trust) to both of you.  You should feel free to ask that person questions about your taxes, investments, etc.  If you do not want to put up a red flag for strategic reasons (i.e., you do not want your spouse to know that you are preparing for a divorce because he/she might then close down all the accounts and disappear!), get an attorney, first, before you call your financial people.  But always remember this: Sometimes your accountant is just as good a “friend” during your divorce as is your lawyer.

For a free 30 minute consultation in Fairfax, Virginia, call Robin Graine at Graine Mediation: 571-220-1998 or email robin@grainemediation.com.  If you need an attorney or CPA referral, I can help you there, too.

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In a Bind? A Few Ways to Get Money from an IRA Penalty-Free

December 12, 2011

Lost your job?  Unexpected HIGH expense?  Unless you have a good nest egg put away for a rainy day, you might be scrambling for funds to cover unexpected expenses, and your IRA might be a place to look for that needed cash.

Are you aware that funds withdrawn from an IRA are taxable, and if you are under 59-1/2, you will pay a federal penalty of 10% and possibly a state penalty too?

Withdrawing funds early from your IRA will affect your standard of living when you retire.  We hope that you never have to do that, but if you do, here are a few ways to beat the early-withdrawal penalty.  (Of course, you still need to deal with the IRS and income taxes – no way to get around that)

·       Annuitize: Under IRC Sec. 72(t) you can avoid penalties by taking a series of substantially equal periodic payments until you are 59-1/2 (but not less than five years). To estimate how much you can withdraw each year, use the 72(t) calculator at Bankrate.com (See:: http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

·      Buy a Home:  If you have been renting, had alternative living arrangements, and have not owned a home for at least two years, you can withdraw up to $10,000 to buy a house in your name or in the name of a spouse, child or grandchild.

·      Pay for Education: You can go back to school, or withdraw funds for college tuition and related expenses (books, materials, fees) for your spouse, children or grandchildren.  Be aware that certain income limits apply.

·      Cover Medical Expenses: If your medical expenses (for you, your spouse or dependant) exceeds 75% of your income, you can withdraw from your IRA penalty-free.

·      Pay Medical Insurance Premiums: If you have been unemployed for at least twelve (12) weeks, and receive unemployment compensation, you are eligible to withdraw funds to pay for your medical insurance premiums.

·      Pay Back Taxes to the IRS:  If the IRS has placed a levy against your IRA, you can withdraw funds to pay the back taxes.

·      Disability: If you are “totally and permanently disabled” by IRS definition, you can take distributions from your IRA without penalty.

·      Death: Did you know that when you die, your beneficiaries must begin taking distributions from your IRA, and there will be no penalty to them.

This blog is 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. All data and information provided on this site is for informational purposes only. wpthemesplugin.com makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.


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Divorce & Taxes Series: Part 3

September 16, 2011

Tax 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 1

September 7, 2011

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.

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).

*  *  *  *  *  *  *

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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