income taxes Archives - Tracy Stewart, CPA

Boomers: In your next relationship just shack up

July 20, 2015 by Tracy Leave a Comment

It used to be called living in sin. It is now socially acceptable and growing by leaps and bounds among boomers. Shacking up is a popular alternative to marriage and divorce, even a nice collaborative divorce. Older people are living together for an average of nine years. Financial reasons top the list of incentives.

Loss of Income. Alimony usually stops when the recipient marries. If you have survivor’s pension benefits, you might lose those if you remarry. If you are receiving a share of your late or former spouse’s Social Security benefits, you could lose those benefits if you remarry before your 60^th birthday. If you remarry after age 60 (age 50 if you are disabled), you can collect benefits on your former spouse’s record.

Potential Financial Burdens. In Texas, both spouses are on the hook for most debts incurred during the marriage, regardless of who incurred the debt. Then there is the cost of nursing homes at $5,000 a month in the Bryan College Station area. As a married couple, such costs can devastate the surviving spouse’s financial security.

Tax Disincentives. If each of you has income, as a married couple you could be thrown into a higher tax bracket. As singles living together, you each get $3,000 of capital losses to offset ordinary income, which results in an offset of $6,000 over the two tax returns. As a married couple filing with a joint tax return, you two would only get $3,000 to offset.

Estate Planning Risks. Protecting their children’s inheritance is a big reason Baby Boomers opt to cohabitate. Assure yourself and your heirs that their inheritance will remain intact. Visit with an estate planning attorney before you move in together. Contact me if you need a recommendation for an excellent estate planning attorney in the Brazos Valley.

In my next blog, I’ll give you tips for what to do and what not to do when shacking up. Do’s and Don’ts for Boomers Living in Sin

Low Cost Divorce

August 5, 2013 by Tracy Leave a Comment

Are you looking for a clean, quick divorce in Bryan/College Station that avoids expensive attorney fees? Your answer is the CPA-driven early intervention mediation. Another name for this is “let’s get it done without wasting money.”

Is this right for you?

You should seriously consider this option if you both answer yes to the following questions.

Are you both on reasonable speaking terms?
Do you both believe you can reach mutual agreements?
Do you both want financial advice about your property division and how it affects your future?
Do you want to arrange your settlement agreement to avoid income tax problems?
Are you ready to move at a quick pace?

Why a CPA mediator?

Attorneys are great with the legal issues, but not so great with the financial issues.

I met a disappointed ex-husband whose Bryan attorney hadn’t told him about the risks of not being able to buy a new home after the divorce. Had he known about this, he would have negotiated differently for the property settlement. He cannot qualify for a mortgage on a new home as long as his name is still on the mortgage tied to the former marital home. His ex-wife is in no hurry to refinance the mortgage.

A New York City divorce attorney found my website and has been calling me to consult on divorce cases. Last year I taught him about the Internal Revenue Code rules on alimony recapture. That kept his client out of hot water with the IRS.

There are many more financial issues that a divorce CPA mediator can identify during mediation. This expertise can help you avoid nasty post-divorce financial surprises.

Who writes the divorce decree?

Just as attorneys shouldn’t pretend to be CPAs, accountants shouldn’t pretend to be attorneys. After I help the two of you have a successful mediation on property and children issues, I recommend two reasonable attorneys who want to write your divorce documents. I pick these Bryan/College Station divorce attorneys carefully for their efficiency and their cooperative style. They will advise you on legal matters, but they won’t try to undo your agreement and burn through your savings account with large legal fees.

If you would like to know more about getting your divorce done without wasting money, ask me about mediating your settlement. Drop me an email at stewart@texasdivorcecpa.com.

Get a Jump on Your Divorce

June 10, 2013 by Tracy Leave a Comment

Looking at a divorce? Get a jump on your case. Save legal fees. Get to settlement sooner. Stop the pain faster.

Make your first step learning about your property settlement options.

Litigation divorce cases in Brazos County move at glacial speed. If you want to end your pain sooner, get a handle on your settlement options before you file and before you seek an attorney. The first thing to do is to meet with a CPA experienced in divorce settlements.

Why shouldn’t you consult with your tax CPA or your investment advisor? Sure, these experts are talented in their own niches. But they don’t have specialized knowledge and experience of working with divorce attorneys through to a wide variety of divorce property settlements. You need a specialist to identify the long-term financial implications from your decisions that will affect your happiness for the long haul. You need a specialist to get you up to speed quickly.

The divorce CPA will walk you through the minefield, showing you where to step and when to jump aside. He or she will explain the pros and cons of your various settlement options. For example, are you thinking of owning the house together with your ex after the divorce? There are dozens of details that can go wrong. There are income tax implications to avoid or take advantage of. If you don’t address all those issues, they can pop up later to sideline your long-term and short-term financial goals.

How will this save you money? When you understand your financial options before your attorney does, you are way ahead in the process. You are closer to ending your pain. You will save time and money when you can interview attorneys with the summary and details of your various settlement options in your hand.

When you are ready to look for a divorce attorney in the Brazos County, contact me. I can help you find the divorce attorney who best fits your situation.

Are you worried about IRS problems haunting you after your divorce?

January 7, 2013 by Tracy Leave a Comment

Texas spouses whose divorcing husbands or wives have controlled the income tax returns during the marriage often worry about having the IRS come after them for back taxes and penalties years after the divorce. If this sounds like you, you can benefit from knowing about innocent spouse relief and an indemnification clause to protect yourself.

When you file a joint return, each of you and your spouse are liable for all of the taxes, penalties and interest owed on the return. After your divorce, you will still be on the hook for the unpaid taxes that apply to your joint tax returns from the years you were married. That is, unless you can qualify for innocent spouse relief.

Early in your divorce, talk with your attorney about getting an indemnification clause in your divorce settlement. In Texas, this would be included in your divorce decree, agreement incident to divorce or a mediated settlement agreement. It would say that your ex-husband or ex-wife is required to reimburse you for future tax liabilities related to prior tax returns.

By the way, the IRS does not care about this indemnification clause. They can still go after you for any taxes, penalties and interest owed from either you or your ex.

A Different Kind of Taxable Alimony

September 13, 2011 by Tracy Leave a Comment

Herman decided to give his wife, Angie, lump sum alimony in their collaborative divorce. He didn’t want it to be taxable to her. He was okay with not taking any tax deduction on his side of the transaction. They can do that. It is legal.

He and his attorney told Angie and her attorney that the alimony in his offer is non-taxable. Angie would get to keep the entire lump sum and none of it would be taxable. Great. Angie considered the lump sum in relation to her cash needs. Looks good.

But, when the agreement was typed up for signatures, it said that Angie was getting her lump sum alimony money from Herman’s IRA account. Herman was going to transfer that IRA money to Angie. He was not going to withdraw it, pay the income tax due and then hand it to Angie. That meant Angie would have to pay income taxes on her alimony when she withdraws it from the IRA. When I point this out to her, she and her attorney are no longer happy.

Surprises are not fun in divorce proceedings. Angie and her attorney started packing their stuff, ready to walk out.

I sat down with Herman and his attorney to try to figure out how he could give Angie a lump sum that will not be taxable to her. After all, he had offered that to her.

He didn’t want to part with any of his cash-in-bank. So, we scoured his IRA and discovered that it included a large chunk of post-tax contributions. This meant that Herman could use the post-tax contribution money for the lump sum alimony. Angie would not have to pay income tax on the alimony money she withdraws from the IRA. Angie and her attorney were back to happy.

Income taxes are hidden in all kinds of places. Be careful.

Don’t Let a Judge Do This to You

June 4, 2010 by Tracy Leave a Comment

A divorcing couple lived in a state that did not enjoy the option of the collaborative law divorce model. They chose to hire litigious attorneys and let the attorneys do the fighting while they retreated to their respective corners, never talking to each other, or so they claimed. (They have three little children, so they must have talked about exchanging them each week.)

Of course, they could not agree on how to divide their property. They had a modest income, a modest house, very little cash, some credit card debt and a couple of retirement accounts. Had they worked collaboratively and with the assistance of a CPA who understands the nuances of divorce financial issues, they could have divided their property in a way that would have achieved both their goals.

This couple eventually ended up in front of a judge, having spent all their cash on their divorce attorneys and even further under credit card debt. The judge divided the property and debts in a manner that he, no doubt, felt was fair and equitable. Unfortunately, is was not financially wise nor was it creative.

This judge divided the property and debts in an overall 60/40 split, with the greater share going to the wife. The husband was granted the home and ordered to pay the wife for her share of the home … with cash and pretty darned quickly, too. His Honor did not inquire as to how the husband was going to get his hands on this $60,000 of cash. He did not inquire as to whether the husband will qualify for a refinance mortgage. Perhaps he did not care. Perhaps he was tired of settling marital disputes for angry, emotional couples who foolishly refuse to talk to one another.

If the husband cannot qualify for a refinance mortgage, he will retain the existing mortgage and the ex- wife’s name will remain on that mortgage obligation. She may be unable to buy a home for herself. Her credit will be tethered to that of her ex-husband as long as her name is still on that mortgage. What mortgage company will wish to give this woman (with a very modest income) a mortgage when she already has one? Furthermore, the husband will have to cash out a sizable portion of his retirement to pay off the wife, incurring unnecessary and avoidable income taxes and penalties.

To me, this is a sad story. This financial debacle was avoidable with collaborative efforts and the aid of a CPA with financial planning expertise, such as a PFS designation. Particular knowledge in divorce issues is a plus. If you are contemplating divorce or in the midst of divorce, stay out of the courtroom. If for no other reason, do it for your own financial security.

Alimony Deductibility

July 31, 2009 by Tracy Leave a Comment

Alimony payments can be deducted by the payor and included in income by the recipient.

In order for this to work, the alimony must qualify as alimony.

The payments must be in cash, checks or money orders. If payments are to a third party (stated to be such in the divorce decree), the payments can be considered alimony if they otherwise qualify for alimony.

Payments must be required by the decree or separation agreement.

The decree cannot designate the alimony payments as “not alimony”.

Spouses can not be members of the same household (much as they may want to be).

Alimony payments cannot be treated as child support.

Alimony payor is not liable to make payments after the recipient’s death.

Payor and recipient cannot file a joint tax return.

Don’t Dilly Dally On Division

July 28, 2009 by Tracy Leave a Comment

Okay, say the decree is signed, the ink is dry and the next step is to actually divide the property. Don’t dilly dally.

According to the Internal Revenue Code, you don’t recognize a gain or loss on a transfer between spouses or to a former spouse incident to divorce. But you need to know the definition of “incident to divorce”.

A property transfer is “incident to divorce” if it….

1. Occurs within one year after the divorce or
2. It is made pursuant to a divorce or separation agreement and occurs within six years after the date the marriage ends.

Thus, get the property transfers into the decree and get them done within less than six years.