Ideas for Divorce Financial Settlements-part 4 of 4
Over the last 4 weeks we have been posting tips and ideas for divorce financial settlements. This is part 4 of 4.
Attorneys are licensed to advise and practice the laws in the state in which they reside and hold licensure in.
Attorneys are not licensed to give financial 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 CPA, who is a Certified Divorce Financial Analyst (CDFA) and/or a 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 :
If one of the parties will have a higher income tax bracket than the other after the divorce, consider settling non-qualified accounts, home equity, and other non-qualified asset splits as “enhanced” alimony payments (from the high-income earner to the low-income earner) versus a lump sum settlement.
Increase/enhance the “alimony” amount to cover the alimony receiver’s tax burden and share equally in the “net” tax deduction savings of the higher income earner.
As an example, presume a couple had $200,000 in equity in a home to be shared equally (change the amount to fit your scenario). Instead of each party taking $100,000 (with no tax implications) consider:
- the high income earner keeps his/her $100,000 with no adjustment
- the high income earner pays the low income earner more than $100,000 (as outlined below) in alimony over 3 years (or whatever duration you mutually choose). Be cognizant that this extra income does not push the low income earner into a higher tax bracket or lower the higher income earner into a lower tax bracket; if it does, adjust accordingly.
- Presume the higher income earner is in the (34% + 6%) = 40% Federal plus State tax bracket. Change the numbers to fit your scenario
- Presume the lower income earner is in the (15% + 6%) 21% Federal plus State tax bracket. Change the numbers to fit your scenario
- Note: the greater the difference between the 2 tax brackets, the greater the benefit of this strategy
- To calculate the fair payment amount to each, net of taxes, here is the formula whereby
- A = the amount of the lower income earner’s share to be “converted” to alimony
- H = the higher income earners Federal plus State tax bracket
- L = the lower income earners Federal plus State tax bracket
- ( A X 2 ) / [( 1 – H ) + ( 1 – L )]
- So in this example:
- ($100,000 X 2) / [(1 – 0.4) + (1 – 0.21)] = $200,000 / (0.6 + 0.79) = $143,885
- The higher income earner would thus pay the lower income earner $143,885 / 3 = $47,962/year for 3 years. This payment should be made in lump sum the first week of January each year.
- The higher income earner gets a cumulative tax break of ($143,885 X 40%) = $57,554
- Thus, net of taxes, the high income earner pays
- $143,885 – $57,554 = $86,331
- compared to paying $100,000 with no tax savings; for a net savings of $13,669
- The lower income earner incurs a cumulative increased tax of ($143,885 X 21%) = $30,216
- Thus, net of taxes, the low income earner receives
- $143,885 – $30,216 = $113,669
- compared to receiving $100,000 with no taxes; for a net increase of $13,669
- As result of this strategy, in this example, each party has an extra $13,669 .
More financial settlement advice and tips in Transitions Divorce® Prep Workbook
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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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