The Year-End Deadline

November 1, 2017

The Year-End Deadline

Once Fall approaches many couples set a deadline of December 31st by which they would like to have finalized their divorce. Setting such an arbitrary end-date has its pros and cons. Let’s look at why it may be good or bad to focus on December 31.

Pro: having a deadline can help move everyone forward. When there is a clear goal the parties may be more motivated to make decisions and come to a consensus on the various issues.

Con: when one party has an end-date in mind but the other party doesn’t, the second party can use the threat of delay as a bargaining chip. “We can wrap this up if you agree to pay me $1,000 per month instead of $500.”

An additional risk of setting a hard deadline is that decisions may be made in haste, without giving the issues sufficient time to be considered thoughtfully. Instead of taking time to think about the long-term effects of decisions around asset division and support, resolutions are made quickly without having been thoroughly vetted. The long-term outcome for one or both spouses may be compromised. A good example of this is when a couple won’t take the time to value a business. Although it may take months to do, and could be costly, without a valuation no one can be sure of the business’s true value, possibly leaving thousands of dollars off the table.

Making a rash decision can hurt for a long time: Mark is age 62 and married to his second wife Kim, who is 45. They have a 7 year-old son Max. Mark generously offers to pay Max’s health insurance until Max is age 26, as a bargaining chip to pay less in alimony to Kim. What Mark failed to consider is that he’ll be 81 when Max turns 26. Mark will have been long retired and may not be able to afford this payment. 

Pro: Finalizing the divorce by December 31 means that each party can file their own tax return for the current year. (IRS laws state that you must file according to your marital status at 12:59pm on December 31st.) This could be preferred by a spouse who may stand to pay less in taxes - for instance, a spouse who has a significant itemized deduction which would result in a refund. That refund didn’t occur when the deduction was netted against joint income, but against the single payer’s income it is more meaningful. It also means the parties do not need to cooperate in filing a joint return in April of the following year, months after their divorce was completed.

Con: it may cost one or both parties more in income tax to file separately, or they may lose some or all of a variety of valuable tax credits including those related to tuition, the Earned Income credit and child and dependent care credit. Although it is inevitable that the divorce is completed and the tax status changes for both spouses, they may have benefited by having more time to analyze the tax impact and make preparations to increase withholding or to set aside money for the coming tax bill.

The involvement of a divorce financial planner helps the client step back and think more comprehensively about their decisions. Our analysis includes evaluating the growth of assets over time, factoring the taxation of various assets, projecting income, estimating the ability to retire, and many more long-term issues. When your client is emotionally attached to an arbitrary date as a deadline, we can step in and assist in guiding the process toward a better outcome. Let us help your client emerge from the divorce process feeling healthy and confident in the future.

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