The Sandon Group
Trusted Mortgage Advisors
Keeping Control During Divorce
by Lee Borden
Most people going through divorce resolve at least at the beginning that they're not going to lose control of themselves, their temper, or their legal bill. And the good news is that most people keep these resolutions. That is, they quietly get about the cruddy, painful business of ending their marriage. They don't spend hours in court, they don't run up thousands of dollars in legal bills, and they're able to get through the pain and get on with their lives.
But there's no question that some people do make mistakes in divorce - big mistakes. And unfortunately, because of the nature of divorce, we often have to live with those mistakes for years - sometimes even for the rest of our lives.
Here are the most common missteps and some ways to avoid them:
1. Giving up control of the divorce - usually to your lawyer. Your lawyer is a professional; he or she is trained to represent your interests in court, and you need to listen carefully to the advice your lawyer gives you. But this is not your lawyer's divorce. It's yours, and you're the one who's going to have to live with the results.
2. Dividing up property without a thorough inventory. I see it nearly every day. Before you begin negotiating, you must build a thorough inventory of what you own and what you owe.
3. Spending too much time and money letting lawyers gather information. The legal term for this is "discovery," and it includes interrogatories, requests for the production of documents, requests for admissions and depositions. Lawyers love discovery. It turns little cases into big cases and keeps the lawyers thoroughly in control of your divorce. Better to gather the information some other way if you can. You and your spouse might be able to simply exchange the information you need. You could use mediation to help you share the information with each other. Before you even go to see the attorneys or mediators, you might consider using a financial preparation kit to help you calculate the after-tax value of your house and other real estate as well your vehicles, household belongings, stocks, bonds, IRAs, retirement plans, and other financial assets.
4. Letting your family or friends tell you what you need, and even sometimes what you should be feeling. Remember, this is your divorce. No one, and I mean no one, should tell you how you should get through it, what you should be saying, what you should be doing or what you should be feeling. Don't be afraid to rely on your own judgment.
5. Not paying enough attention to taxes. I see this one all the time. People negotiate, reach agreement, and get divorced without thinking through the tax impact of the concessions they're making. It's not at all unusual for one of the spouses to get a nasty surprise several months - or years - after the divorce, when they realize for the first time that they're facing a big tax bill they didn't know about, such as capital gains on the sale of property. I see more of what I call "big dollar boners" in this area than in any other, so I've given a lot of thought to what makes it happen that way. What happens is that judges in most states don't pay much attention to tax, and so most lawyers don't pay much attention to tax, either.
6. Trying to win back your spouse by being generous. This one makes me cry. Here's the scenario: the spouse who is the left one isn't ready for the marriage to end and decides that he or she can win back the leaver by "being nice." He or she lets the leaver have everything and agrees to far less than fairness would dictate, fantasizing that the leaver will realize what a wonderful person he or she is leaving and return to the marriage. I've haven't yet seen this work. What tends to happen instead is that the leaver holds the left in contempt, takes what is offered and leaves. The left realizes his or her folly only much later when it's too late to reverse it. The knowledge that he or she has been taken advantage of makes the left one resent the leaver and the system, and further delays the left one's recovery from divorce. Yes, you read that right. It makes a bad situation worse, not just financially but emotionally as well.
Tuesday, January 8, 2008
Thursday, January 3, 2008
Divorce, Your Home and Taxes
The Sandon Group
Trusted Mortgage Advisors
Taxing Issues During Divorce
by Lee Borden
It's often said that there are really three parties to a divorce: the husband, the wife and Uncle Sam. In a sense, that's right. Far too many people negotiate and finalize their divorce without taking proper account of the tax impact of the decisions they're considering . Here's a quick summary of some of the issues I see people miss most often:
Capital Gains on Your House
Capital gains taxes on home sales used to be a huge issue, but the tax bill that took effect in August of 1997 effectively eliminated the problem for the vast majority of homeowners. The law allows you to exclude up to $250,000 of the gain from taxable income if you're single and $500,000 if you're married . But one real risk remains: you can still take a serious hit if you wait too long after you move out of the house before you sell your interest in it.
The catch is that the house must have been your "principal residence" for two of the past five years when you sell it. That means that the house must be sold within three years of the time you move out . It's common these days in divorce for one of the spouses to move out of the house but to continue owning an interest in it for several years. Once you've been out of the house for more than three years, though, it's no longer considered your "principal residence." If it's sold at a gain, you'll owe tax on it. Even here, however, Congress has offered some help. The new tax law says that if you move out of the house and your spouse has the right to live in it pursuant to a divorce or written separation agreement, your spouse's residence in the house will be counted as your residence for purposes of calculating the two-year residence requirement.
Alimony vs. Child Support
If you get alimony, it's part of your taxable income. If you pay alimony, it's tax deductible. Child support is not taxable or tax-deductible . So all other things being equal, the spouse who is paying support wants as much of it as possible to be considered alimony, and support recipients naturally want as much of the support as possible to be considered child support.
But all other things are not usually equal, especially when it comes to incomes. When the difference is significant, there may be an advantage to both spouses to make most of the payments in the form of alimony rather than child support, because the tax advantages of alimony leave more money for higher support payments.
It's not unusual in divorce for the higher-income spouse to agree to pay the additional incidental expenses of the other spouse for a term of years, sometimes indefinitely. Typical payment arrangements might include medical insurance, life insurance, home mortgage payments and car payments. If you're the one shelling out the money, it's usually smart to take the time to ensure that the payments for each such expense qualify as alimony.
The same principle applies to the payments on a one-time property settlement in connection with the divorce itself. It's often better for both spouses if these can be paid in the form of periodic alimony. Again, the paying spouse may need to increase the payments to compensate the receiving spouse for the cost of the taxes, but both spouses can end up with more money to spend.
A caution is probably in order here: precisely because it's better for many couples to pay and receive support in the form of taxable alimony, the government has set up a multi-faceted system of restrictions that can be a trap for the unwary taxpayer who gets too greedy in characterizing support as alimony . One set of restrictions tests to make sure alimony is not "front-loaded" - that is, too concentrated in the period immediately after the divorce.
If the IRS decides what you're calling "alimony" is really just disguised property settlement money - what the IRS calls "excess alimony" - you won't be able to exclude it from your taxable income.
Another set of restrictions tests to make sure the alimony isn't reduced or eliminated on a date corresponding to a date when one or more of the children reaches one of several specified ages, such as the age of majority There's even a special test - I call it the "weird and wonderful" test - to make sure the alimony isn't reduced or eliminated on two separate dates corresponding to a given age for two or more children.
If you flunk this test, the IRS will call your payments "alimony fixed as child support," and you won't be able to exclude it from your taxable income.
Exemptions for the Children
Nearly all divorcing couples are aware of the tax exemptions for the children, and it's typical for each spouse to believe that he or she is entitled to them. The IRS assumes that the spouse who has custody of the children is entitled to the exemptions, but the spouses are allowed to trade them back and forth freely, using IRS Form 8332. With the passage of the Tax Reform Act of 1997 , the exemption now carries with it the right to use the $500 child credit for each child and to use the Hope Scholarship and the Lifetime Learning Credit for dependent college age children.
When there are multiple children, one option parents often use - usually the wrong one - is for the spouses to split the exemptions. This may feel fair to both spouses, but you're rarely better off to share the exemptions. If one spouse's income is substantially higher than the other's, the spouses will be worse off, because they will have missed a chance to maximize tax savings.
The better approach is to consult an expert on tax in divorce who can calculate the value of the exemption(s) to each spouse. The one who can make better use of the exemption(s) should take all of them, and if appropriate, compensate the other spouse.
Child Care Credit
The parent who has custody of the children is entitled to claim a credit of from 20 percent to 30 percent of the cost of work-related childcare, up to a maximum of $960 for two or more children under the age of 13. Unlike the exemption, the childcare credit can't be traded; it's available only to the custodial parent. The fact that the custodial parent has assigned one or more exemptions using IRS Form 8332 has no effect on the ability to claim the credit for childcare expenses.
Filing Status
Your marital status for tax filing is set as of the last day of the year. So if you're married on December 31 (and you file based on the calendar year, as most of us do), you must file as married (either jointly or separately). If you are divorced as of December 31, you must file single (either as head of household or not).
On average (and there certainly are exceptions), the tax rates get higher in the following order (meaning I've listed the most advantageous rate first):
Married filing jointly
Single Head of household
Single
Married filing separately
Timing of the Divorce
The marital status of the parties for the purpose of filing their tax return is set as of the last day of the fiscal year. A couple contemplating divorce near the end of the year should consider whether they would be better off making their divorce effective before the end of the year - allowing them to file as single taxpayers- or making their divorce effective after the end of the year, allowing them to file a joint return.
One caution about filing jointly: the less financially savvy spouse needs to understand that signing a joint return with his or her spouse exposes him or her to liability, even if he or she is not privy to all the calculations included in the return. An "innocent spouse" rule allows a spouse to escape liability in a few cases. It is narrowly drawn, however, and should never form the basis for planning.
Because trust is often at a low ebb as divorcing couples are preparing their final joint return, the less financially savvy spouse may decide to hire an independent accountant to review the return and its supporting documents before he or she signs it.
In fact, if you are divorcing and have property to divide or financial decisions to make regarding your children, a visit to an accountant could save you money.
Related Web links:
Internal Revenue Service Tax and Accounting Sites Directory
Lee Borden is a lawyer and divorce mediator based in Birmingham, Ala., who loves his work. His Web site, divorceinfo.com , includes other articles.
Trusted Mortgage Advisors
Taxing Issues During Divorce
by Lee Borden
It's often said that there are really three parties to a divorce: the husband, the wife and Uncle Sam. In a sense, that's right. Far too many people negotiate and finalize their divorce without taking proper account of the tax impact of the decisions they're considering . Here's a quick summary of some of the issues I see people miss most often:
Capital Gains on Your House
Capital gains taxes on home sales used to be a huge issue, but the tax bill that took effect in August of 1997 effectively eliminated the problem for the vast majority of homeowners. The law allows you to exclude up to $250,000 of the gain from taxable income if you're single and $500,000 if you're married . But one real risk remains: you can still take a serious hit if you wait too long after you move out of the house before you sell your interest in it.
The catch is that the house must have been your "principal residence" for two of the past five years when you sell it. That means that the house must be sold within three years of the time you move out . It's common these days in divorce for one of the spouses to move out of the house but to continue owning an interest in it for several years. Once you've been out of the house for more than three years, though, it's no longer considered your "principal residence." If it's sold at a gain, you'll owe tax on it. Even here, however, Congress has offered some help. The new tax law says that if you move out of the house and your spouse has the right to live in it pursuant to a divorce or written separation agreement, your spouse's residence in the house will be counted as your residence for purposes of calculating the two-year residence requirement.
Alimony vs. Child Support
If you get alimony, it's part of your taxable income. If you pay alimony, it's tax deductible. Child support is not taxable or tax-deductible . So all other things being equal, the spouse who is paying support wants as much of it as possible to be considered alimony, and support recipients naturally want as much of the support as possible to be considered child support.
But all other things are not usually equal, especially when it comes to incomes. When the difference is significant, there may be an advantage to both spouses to make most of the payments in the form of alimony rather than child support, because the tax advantages of alimony leave more money for higher support payments.
It's not unusual in divorce for the higher-income spouse to agree to pay the additional incidental expenses of the other spouse for a term of years, sometimes indefinitely. Typical payment arrangements might include medical insurance, life insurance, home mortgage payments and car payments. If you're the one shelling out the money, it's usually smart to take the time to ensure that the payments for each such expense qualify as alimony.
The same principle applies to the payments on a one-time property settlement in connection with the divorce itself. It's often better for both spouses if these can be paid in the form of periodic alimony. Again, the paying spouse may need to increase the payments to compensate the receiving spouse for the cost of the taxes, but both spouses can end up with more money to spend.
A caution is probably in order here: precisely because it's better for many couples to pay and receive support in the form of taxable alimony, the government has set up a multi-faceted system of restrictions that can be a trap for the unwary taxpayer who gets too greedy in characterizing support as alimony . One set of restrictions tests to make sure alimony is not "front-loaded" - that is, too concentrated in the period immediately after the divorce.
If the IRS decides what you're calling "alimony" is really just disguised property settlement money - what the IRS calls "excess alimony" - you won't be able to exclude it from your taxable income.
Another set of restrictions tests to make sure the alimony isn't reduced or eliminated on a date corresponding to a date when one or more of the children reaches one of several specified ages, such as the age of majority There's even a special test - I call it the "weird and wonderful" test - to make sure the alimony isn't reduced or eliminated on two separate dates corresponding to a given age for two or more children.
If you flunk this test, the IRS will call your payments "alimony fixed as child support," and you won't be able to exclude it from your taxable income.
Exemptions for the Children
Nearly all divorcing couples are aware of the tax exemptions for the children, and it's typical for each spouse to believe that he or she is entitled to them. The IRS assumes that the spouse who has custody of the children is entitled to the exemptions, but the spouses are allowed to trade them back and forth freely, using IRS Form 8332. With the passage of the Tax Reform Act of 1997 , the exemption now carries with it the right to use the $500 child credit for each child and to use the Hope Scholarship and the Lifetime Learning Credit for dependent college age children.
When there are multiple children, one option parents often use - usually the wrong one - is for the spouses to split the exemptions. This may feel fair to both spouses, but you're rarely better off to share the exemptions. If one spouse's income is substantially higher than the other's, the spouses will be worse off, because they will have missed a chance to maximize tax savings.
The better approach is to consult an expert on tax in divorce who can calculate the value of the exemption(s) to each spouse. The one who can make better use of the exemption(s) should take all of them, and if appropriate, compensate the other spouse.
Child Care Credit
The parent who has custody of the children is entitled to claim a credit of from 20 percent to 30 percent of the cost of work-related childcare, up to a maximum of $960 for two or more children under the age of 13. Unlike the exemption, the childcare credit can't be traded; it's available only to the custodial parent. The fact that the custodial parent has assigned one or more exemptions using IRS Form 8332 has no effect on the ability to claim the credit for childcare expenses.
Filing Status
Your marital status for tax filing is set as of the last day of the year. So if you're married on December 31 (and you file based on the calendar year, as most of us do), you must file as married (either jointly or separately). If you are divorced as of December 31, you must file single (either as head of household or not).
On average (and there certainly are exceptions), the tax rates get higher in the following order (meaning I've listed the most advantageous rate first):
Married filing jointly
Single Head of household
Single
Married filing separately
Timing of the Divorce
The marital status of the parties for the purpose of filing their tax return is set as of the last day of the fiscal year. A couple contemplating divorce near the end of the year should consider whether they would be better off making their divorce effective before the end of the year - allowing them to file as single taxpayers- or making their divorce effective after the end of the year, allowing them to file a joint return.
One caution about filing jointly: the less financially savvy spouse needs to understand that signing a joint return with his or her spouse exposes him or her to liability, even if he or she is not privy to all the calculations included in the return. An "innocent spouse" rule allows a spouse to escape liability in a few cases. It is narrowly drawn, however, and should never form the basis for planning.
Because trust is often at a low ebb as divorcing couples are preparing their final joint return, the less financially savvy spouse may decide to hire an independent accountant to review the return and its supporting documents before he or she signs it.
In fact, if you are divorcing and have property to divide or financial decisions to make regarding your children, a visit to an accountant could save you money.
Related Web links:
Internal Revenue Service Tax and Accounting Sites Directory
Lee Borden is a lawyer and divorce mediator based in Birmingham, Ala., who loves his work. His Web site, divorceinfo.com , includes other articles.
Friday, December 21, 2007
Divorce and Your Home's Mortgage
The Sandon Group
Trusted Mortgage Advisors
Divorce and Your Home. There are many questions you might be asking at this time, particularly surrounding your home. We are here to help. Let’s first break down some of the basics.
“I think I want to stay in my home…what do I need to keep in mind?” First, take into consideration the size of the home, utilities, payments, family needs. Does staying in the home truly make sense? You will likely now be entirely responsible for the mortgage payments on the house, taxes, insurance, upkeep, maintenance and other related bills. Your household income may be decreasing, and your overall expenses may be increasing if you are subject to a court order for support, so it is important that you are aware and thorough in determining what your actual expenses will be in keeping and maintaining the home on your own.
“What if I do want to purchase another home before the divorce is final?” This may be possible, but be aware that your spouse may have a marital interest in your new property, and it will need to be handled by your attorney with a Quit Claim Deed being given from your ex-spouse to you. You will also have to qualify for a new mortgage using the full debt from the current homes mortgages, because there would not yet be a final divorce decree assigning ownership. Be very careful with this situation, especially as the financial situation you expect…may not be the final result, once the decree is entered.
Taking the time to talk with us during this process and before you decide to start looking at a new home can help eliminate many of the concerns or questions that often surface in these situations. We understand this may be a very difficult time, and you have many decisions to make. We can provide you with a free financial consultation, credit check, and mortgage strategy review – so that you have the answers and information you need to make good decisions.
The Sandon Group
www.sandongroup.com
(813) 319-6500
Trusted Mortgage Advisors
Divorce and Your Home. There are many questions you might be asking at this time, particularly surrounding your home. We are here to help. Let’s first break down some of the basics.
“I think I want to stay in my home…what do I need to keep in mind?” First, take into consideration the size of the home, utilities, payments, family needs. Does staying in the home truly make sense? You will likely now be entirely responsible for the mortgage payments on the house, taxes, insurance, upkeep, maintenance and other related bills. Your household income may be decreasing, and your overall expenses may be increasing if you are subject to a court order for support, so it is important that you are aware and thorough in determining what your actual expenses will be in keeping and maintaining the home on your own.
“What if I do want to purchase another home before the divorce is final?” This may be possible, but be aware that your spouse may have a marital interest in your new property, and it will need to be handled by your attorney with a Quit Claim Deed being given from your ex-spouse to you. You will also have to qualify for a new mortgage using the full debt from the current homes mortgages, because there would not yet be a final divorce decree assigning ownership. Be very careful with this situation, especially as the financial situation you expect…may not be the final result, once the decree is entered.
Taking the time to talk with us during this process and before you decide to start looking at a new home can help eliminate many of the concerns or questions that often surface in these situations. We understand this may be a very difficult time, and you have many decisions to make. We can provide you with a free financial consultation, credit check, and mortgage strategy review – so that you have the answers and information you need to make good decisions.
The Sandon Group
www.sandongroup.com
(813) 319-6500
Thursday, December 13, 2007
Divorce and Sharing Your Home's Equity
The Sandon Group
Financing Your Dreams Into Reality
Frequently asked question: My spouse is entitled to share in the equity we have in our home...how is this handled?
This is a must ask and get answered question before you proceed with your divorce. Your attorney may be excellent in his/her area of expertise, but they do not know the ins and outs, the costs or the market conditions as well as your mortgage professionals.
First, the equity in the home needs to be determined, most often by an appraiser. It is important that the appraiser is licensed and is ethical. You should use an independent appraiser, unrelated to the parties involved, to avoid any bias. Mortgage Loan Officers are the primary source of an appraisers business and can give you a referral to a good appraiser.
The appraised value less the eventual costs of selling (commissions and seller closing costs) equals the equity to be split between the parties. Unfortunately, we have seen often where the equity was split without taking into the cost of selling. This ends up costing the person retaining the home 6-10% of the home's value or $18,000-$30,000 on a $300,000 home.
With the divorce, your spouse may put a marital lien on the property or there may be a court ordered mandate for distribution of the equity, possibly including interest on the amount. This means if you are retaining the home, that you will likely have a specified amount of time to obtain funds needed to give the ex-spouse their portion of the equity. This can be done by cashing out the equity in the home with a new mortgage, selling the home or by using other assets you have to buy out their stake in the home. You will want the advice of a trusted mortgage professional.
If you are the one leaving the home, be sure that there is clear time lines for you to receive your portion of the euqity. You will also want to require that your name be removed from the mortgage note. A "Quit Claim Deed" does not remove you from financial responsibility, only from title. The person retaining the home will either need to refinance your name off of the mortgage or contact your current lender and ask to do a "qualifying name delete assumption".
If you would like additional information or have more questions you can contact me at lsandon@minnmortgage.com.
Financing Your Dreams Into Reality
Frequently asked question: My spouse is entitled to share in the equity we have in our home...how is this handled?
This is a must ask and get answered question before you proceed with your divorce. Your attorney may be excellent in his/her area of expertise, but they do not know the ins and outs, the costs or the market conditions as well as your mortgage professionals.
First, the equity in the home needs to be determined, most often by an appraiser. It is important that the appraiser is licensed and is ethical. You should use an independent appraiser, unrelated to the parties involved, to avoid any bias. Mortgage Loan Officers are the primary source of an appraisers business and can give you a referral to a good appraiser.
The appraised value less the eventual costs of selling (commissions and seller closing costs) equals the equity to be split between the parties. Unfortunately, we have seen often where the equity was split without taking into the cost of selling. This ends up costing the person retaining the home 6-10% of the home's value or $18,000-$30,000 on a $300,000 home.
With the divorce, your spouse may put a marital lien on the property or there may be a court ordered mandate for distribution of the equity, possibly including interest on the amount. This means if you are retaining the home, that you will likely have a specified amount of time to obtain funds needed to give the ex-spouse their portion of the equity. This can be done by cashing out the equity in the home with a new mortgage, selling the home or by using other assets you have to buy out their stake in the home. You will want the advice of a trusted mortgage professional.
If you are the one leaving the home, be sure that there is clear time lines for you to receive your portion of the euqity. You will also want to require that your name be removed from the mortgage note. A "Quit Claim Deed" does not remove you from financial responsibility, only from title. The person retaining the home will either need to refinance your name off of the mortgage or contact your current lender and ask to do a "qualifying name delete assumption".
If you would like additional information or have more questions you can contact me at lsandon@minnmortgage.com.
Tuesday, November 27, 2007
What if I am leaving the home due to divorce?
The Sandon Group
When going through an imminent divorce there are many questions to be asking, particularly surrounding your home.
If you are the one leaving the home, it is important to know that even though the divorce decree may state that your spouse was awarded the home and assumed it's financial obligations, you are still obligated for this debt in the eyes of the mortgage company and the credit bureaus.
Many people, and even some family law attorney's, mistakenly assume that by filing a Quit Claim Deed removing you from the title, that you will no longer be responsible for the mortgage. A Quit Claim Deed only eliminates your name from the title of the property, but not from the mortgage loan.
In our business, we have unfortunately seen first hand the damage this mistaken belief can do to a persons credit and finances.
See my blog "How divorce impacts your credit and what you can do about it"
When going through an imminent divorce there are many questions to be asking, particularly surrounding your home.
If you are the one leaving the home, it is important to know that even though the divorce decree may state that your spouse was awarded the home and assumed it's financial obligations, you are still obligated for this debt in the eyes of the mortgage company and the credit bureaus.
Many people, and even some family law attorney's, mistakenly assume that by filing a Quit Claim Deed removing you from the title, that you will no longer be responsible for the mortgage. A Quit Claim Deed only eliminates your name from the title of the property, but not from the mortgage loan.
In our business, we have unfortunately seen first hand the damage this mistaken belief can do to a persons credit and finances.
See my blog "How divorce impacts your credit and what you can do about it"
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