The Value of a Certified Divorce Financial Analyst

April 1, 2016

There is an old saying, “If all you have is a hammer, everything looks like a nail.” It is meant to imply that if you are familiar with a single, certain subject you may have a confirmation bias to believe it is the answer to any problem.  Could it be applied to Certified Divorce Financial Professionals? We do believe we have important knowledge and can be helpful in any divorce case. Are we the answer to every problem? Probably not. But here is a sample of questions I have been asked by divorce attorneys in the past, illustrating the importance of good financial advice in any divorce case:

If my client is receiving Social Security disability, can she also collect on her husband’s Social Security two years after the divorce?

It’s great to see that this attorney knows that Social Security benefits can be collected on a divorced spouse’s record, and even better, knows that the benefit is not available until the couple has been divorced for 2 years. The answer to this is no, you cannot collect two benefits. If one is receiving Social Security disability payments that person will not qualify for an additional spousal benefit.

Last year I settled a case in which my client was awarded half the proceeds from the vacation home, which was sold during the year. Her accountant says she owes taxes on the gain – is that true?

Yes, a vacation home is similar to an investment in the eyes of the IRS, and is taxed the same way. Any gain on the sale of the home (the sale price less the cost basis) is taxable as a short-term capital gain (if the house was owned for less than 1 year) or a long-term capital gain (if owned for 1 year or more). Only the personal residence, which is defined as a home you have lived in for 2 of the past 5 years, is eligible for the home-sale exclusion.

Instead of paying alimony, which my client doesn’t want to do, can he give his spouse a lump sum payment and deduct it as alimony?

This question comes up frequently since many spouses don’t want to make alimony payments, and would rather take care of that obligation with one payment. However the IRS won’t allow that payment to be called alimony, and thus the payer won’t get a tax deduction. This is because of the “alimony recapture rule”, which states that if alimony is reduced by more than $15,000 per year between years 1 and 2, or years 2 and 3, then some of the payments (according to a formula) will not be counted as alimony for tax purposes.

Can you tell us what the income taxes would be if my client earns $53,000 per year as a single parent? And what are the taxes if she also gets $3,000 per month in alimony?

Taxes are an important component of a divorce financial analysis. Just as in the question about the vacation home above, a settlement that looks good on a pre-tax basis can look quite different when taxes are taken under consideration. A spouse who hears “$3,000 per month in alimony” may not realize that up to 35% of that could be lost to taxes. That’s why looking at the whole settlement on an after-tax basis, and comparing after-tax income to living expenses, ensures your client is not left wanting after the settlement is completed.

Also worth considering is whether this parent should take an exemption for one or more of the children. By comparing the tax situation of both spouses we can help you determine who gets the most value out of tax exemptions.

If my client is able to keep her 401(k) in the divorce can she take money out of it without paying a penalty?

This attorney is referring to the IRS rule that allows a recipient spouse, under the age of 59 ½, to take money out of a 401(k) or 403(b) awarded from the employee-spouse without incurring a 10% penalty. This rule applies to a 401(k) or 403(b) that did not belong to the recipient, but has been awarded to them through the divorce. In the case above the account belonged to the recipient in the first place so no, she cannot take a distribution without paying a penalty. If the 401(k) had belonged to her spouse then she would be eligible for the penalty-free withdrawal before rolling the account into an IRA.

These are just a few of the questions that are thrown our way. They highlight different ways that a CDFA® brings important knowledge to a divorce case, ultimately helping you and your client to make better-informed decisions. The case doesn’t have to be “high net worth” to warrant a financial review; we assist in cases with few financial assets, houses under water, and other difficult financial situations. The value added by incorporating a CDFA® into the case can be important.

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