I’ve seen it time and time again. When divorcing spouses sign divorce agreements without the guidance of an experienced Financial Divorce Specialist, the result can be significantly higher income taxes and unnecessary penalties for either or both spouses.
Many times, the Maryland Separation and Divorce Agreement (MSA) does not address significant tax issues, its terms are based upon old tax law, or possible tax traps, e.g. the Alternative Minimum Tax or restrictions on mortgage interest are overlooked.
Significant tax dollars can be lost if these issues are not addressed correctly:
- Use, possession, and eventual sale of the family home
- Filing status – can one or both spouses claim Head of Household?
- IRS criteria for filing Single or Married Filing Separately
- Withdrawals from retirement plans prior to age 59 ½
- Child Tax Credit and credits for education and dependent care
- Alimony vs. mortgage interest and tax deductions
- Sale of Home capital gains exemption reduction
- The deductibility of home mortgage interest with two homes
There are many more “traps,” but there are also significant financial issues that need consideration.
Often the Agreement calls for one spouse to refinance and purchase the “out spouse’s” interest in the family home. With the “new normal” in today’s economy, refinancing can be extremely difficult or in some cases, impossible. Ideally, the buyer–spouse should be working with a mortgage consultant during the process to identify the refinance criteria and prevent future surprises.
Since any refinancing considers future income, you can see how the support issue could work in tandem with this action. In any event, the clause regarding the disposition of the home should include details about the choice of realtor, the calculation of the sales price, any potential reduction in the listing price, and the trigger for automatic sale or buy out.
When dividing retirement funds, not every fund needs to be divided. Most Company Plans must be divided by a Qualified Domestic Relations Order (QDRO) that can cost $500 per Order. On the other hand, IRAs do not need a QDRO; therefore, the agreement should allow for the equalization in the most practical, cost-effective manner.
Any one of these issues could cost either spouse or their children thousands of dollars over time. A Certified Divorce Financial Analyst CDFA™ is comprehensively trained in the financial and tax issues of divorce. Their recommendations can be invaluable and the cost of their input can be an excellent investment in both spouse’s financial future.
If you are contemplating divorce or in the process, email or call John Faggio now at 410-988-7333 to take advantage of our fixed-fee initial consult. Many times, this consult can uncover the issues above that are pertinent to your situation.