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Ideas for Divorce Financial Settlements-Part 3

transitions11 • September 20, 2016

Over the past several weeks we have been posting tips for divorce financial settlements, this is part 3 of 4. Attorneys are licensed to advise and practice the lawsin the state in which they reside and hold licensure in. Attorneys are not licensed to give financial tax advice, investment or portfolio advice.

Before one enters into financial negotiations or mediation for a financial divorce settlement it is wise to seek the advice of a Certified Divorce Financial Analyst (CDFA), CPA and/or Tax Advisor regarding the particular details of their family situation and potential financial/tax implications of what they are considering for final settlement terms.

Budgeting for recommendations from a licensed financial professional is a far better investment in family funds to be prepared to make permanent financial decisions in a negotiation or mediation. A CPA, Tax Attorney prepared the following points of discussion included in our Transitions Divorce® Prep Workbook :

Note that a direct distribution from an IRA or 401-K to a separate IRA or 401-K (between the spouses) per the QDRO is not hit with the 10% IRS penalty.

Have the higher income earner each year claim all the kids as dependents on his/her tax return then have ex-spouses share the “net” tax savings equally via a check from the high income earner to the lower income earner.

An example to implement this:

Presume the high income earner has a marginal Federal tax rate of 34% plus 6% State whereas the lower income earner has a Federal tax rate of 15% plus 6% State. Presume the standard child deduction is $3,700 (it changes most years) and there are 3 children. 

  • The higher income earner would save [(34% + 6%) X $3,700 X 3 = $4,440]
  • The lower income earner would save [(15% + 6%) X $3,700 X 3 = $2,331]
  • The annual tax savings differential in this case is $4,440 – $2,331 = $2,109
  • The average between the two is $3,385.50
  • The higher income earner would claim all 3 dependents and then write a check to the lower income earner for [($3,385.50 / 2) = $1,692.75]
  • Over 2 years, instead of the high income earner getting a $4,440 tax savings year one and then $0 in year two (because the spouse claims the dependents) for a total of $4,440 , the high income earner would get ($4,440 – $1,692.75) + ($4,440 – $1,692.75) = $5,494.50 . Note this is an extra tax savings of $1,054.50 compared to alternating claiming dependents.
  • Over 2 years, instead of the low income earner getting a $0 tax savings year one (because the spouse claims the dependents) and then $2,331 in year two for a total of $2,331 , the low income earner would get ($1,692.75) + ($1,692.75) = $3,385.50 . Note this is an extra tax savings of $1,054.50 compared to alternating claiming dependents.

To determine the exact tax savings differential each year, once each person’s tax return is completed run a “dummy” version whereby the only adjustment to each person’s tax return is eliminating the dependents or adding the dependents, as the case may be. Then look at what the combined Federal plus State tax differential is for each of you.  The higher income earner would then write a check for half of the net savings to the lower income earner.

More financial settlement advice and tips in Transitions Divorce® Prep Workbook

 

Disclosure of Material Connection : I have not received any compensation for writing this post. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR. Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

Disclaimer: This is my personal blog. The opinions I express here do not necessarily represent those of my organization, Transitions Resource, LLC. The information I provide is on an as-is basis. I make no representations as to accuracy, completeness, suitability, or validity of any information on this blog and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its use.

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