3 Ways To Get Screwed During A Divorce

It it silly to think that had the marriage lasted the “hot and heavy” aggression would have been kept behind closed doors instead of feeling like you’re getting screwed during the divorce.  Now that the separation papers are filed you are in for a rude awakening and this article will tell you three ways I see clients get fleeced, pretty regularly.

The Enemy Of Divorce

The scene opens as the hero begins putting on their armor as they prepare for battle.  A little bruised the hero reaches for their weapons, turns to their team, and shouts “Let’s do this!”

Someone shouts “Are we getting paid for this?”

Confused, the hero slowly turns to the vocal individual and says “Doing the right thing is priceless! Now who’s with me?!?”

The team mumbles amongst themselves, turns to the hero and says “Thanks but I can’t pay my bills for always doing the right thing.”

This is what I think when someone asks a professional for free advice.  Of course we all want to give you advice for free!  But there is one small problem…money always seems to get in the way of doing the right thing and paying the bills.  But the reality is, money makes the world run and therefore is required to fulfill an obligation.

How many of you have heard the saying “There is no such thing as a free lunch?”

Well the concept is well-known amongst those having taken economics in college.  Milton Friedman quite simply stated that in the world we live in today “there is no such thing as a free lunch” which roughly translated into “you cannot get something for nothing.”

This concept is never more true than when you need the help of a professional to wade through some of the frustrating points in your divorce.  Sadly, when you are going through one of the most emotional times in your life, paying the professional to dissolve your marriage seems like salt in the wound.

This makes me wonder, is there a better way?

While I am not an attorney I can tell you as a Certified Divorce Financial Analyst (CDFA) that the more active a client is in their divorce the easier it is on the process and the less they may pay in legal fees (in my experience).  Let me give you an example:

Imagine your attorney files for discovery and requests your soon-to-be ex to provide their financial documents, along with other documents.  When they receive them the attorney is going to have a paralegal (or assistant) review the files and compile the data into something digestible.  Once complete they will want to review the files with you and determine if there is anything missing.

Now if you are not prepared or do not know where your assets were prior to filing for divorce then you might not have any clue what you are looking at.  Therefore you might shrug and assume what you are looking at is fact.  But what if it wasn’t?  What if in fact there was something missing?  How would you know?

This is where compiling a list of your income, expenses, and assets before filing for divorce or separation will be immensely valuable.  Had you compiled a list of your household’s overall financial picture prior to separation then you would have a pretty good understanding of where everything was and whether your soon-to-be ex is hiding anything.

More importantly, being prepared and taking an active role in the process can actually save your attorney time which in turn can save you money because they shouldn’t need to do as much leg work.

The professionals you hire should not be viewed as the enemy but as a resource at your disposal.  When used correctly they can be quite valuable in the divorce process.  But when you are not prepared you can expect their fees to climb as they have to do extra legwork to compile, evaluate, and prepare documents that will be used to help divide your assets.  That means instead of dividing more of your assets between you and your spouse, you will be dividing your assets between three parties: you, your ex, and the professionals both of you hire.

Being prepared with facts, figures, notes, and goals heading into your professional’s office will only benefit you and the process.  Otherwise, be prepared for a higher bill at the end… in which I have heard people say “I am being screwed out of my own money by….”.

Alimony

It amazes me how many times people say they are either entitled to alimony or will be forced to pay it.  In fact their comments make me wonder if they know who gets alimony in a divorce or if they know how to calculate alimony.

In my opinion, alimony should be viewed as a resource to help the low-income earner get back on their feet after the divorce.  Whether that resource is paid upfront or paid out over a period of time, I do not subscribe to it being viewed as a “penalty” for getting divorced.

That being said, the new tax law is going to make this argument even more complicated.

How?

If you file for divorce prior to 12/31/2018 then you will be grandfathered into the “old” alimony rules which allow the payer of alimony to deduct the alimony payment from their personal income taxes and the recipient to claim the income.  This eases the obligation on the payer and requires the recipient to ensure they “pay their share” in taxes.

Sounds reasonable right?  Well buckle up for this one…

If you plan on filing for divorce after 01/01/2019 then you will be subject to the new tax law, laid out in the Tax Cuts & Jobs Act, which states alimony will no longer be deductible by the payer and no longer be claimed by the recipient.

WHAT?? Let that sink in…

When you were filing Married Filing Jointly (MFJ) your marginal tax bracket was 22% or 24% depending on your deductions according to the new 2018 tax law.  Now that you are filing Married Filing Separately (MFS) the higher income earner’s tax brackets are either 24% or 32% depending on deductions, which are now split between both spouses.

Yes, you read that right!  Your taxes went UP!

Let me throw salt in the wound…

During separation, and eventually when you are divorced, your tax bracket will stay roughly the same from when you filed MFS to when you file single (though income limits change in the 22%, 32%, 35%, and 37% brackets).

That means if you made $175k and were obligated to pay $40k in alimony your marginal tax rate would have dropped, prior to 2018, from the 28% bracket to the 25% bracket.  After 01/01/2019 you cannot deduct the alimony payments which means your bracket increases from 2017’s MFJ marginal bracket of 25% to 2018’s single filing marginal bracket of 32%.

Now this feels like a penalty… leave it to the government to turn something that was designed to be rehabilitative and make it punitive.

This means that you are essentially paying income to your ex-spouse, net of taxes, AND paying an additional 8% in tax (32% – 24% = 8%).

Why did the government do this?  I have to think it was a compromise to fund the rest of the tax bill.  If they can force the higher income earner to pay more in taxes then they can afford to fund something else in the new tax law.

Now let’s rub the salt in the wound…

The way the new tax law is written the new lower tax brackets are set to sunset in 2025.  This means they are expected to return to pre-2018 tax law levels unless Congress decides to extend them.

What doesn’t expire?  The alimony adjustment…

That means you can look forward to paying MORE income tax on the portion of alimony you are required to pay your ex-spouse.

Talk about getting screwed…

Tip your hat to Congress… they really know how to stick it to you and prolong the pain of divorce.

Taxes

While we are on the topic of taxes… there is something else you should be aware of if you are the non-custodial parent.

Prior to the new 2018 tax law, the non-custodial parent could request claiming the child(ren) from one year to the next.  This would allow the non-custodial parent to take the personal exemption of the child(ren).  In 2017 individuals earning less than $261,000 were able to take the entire personal exemption.  Above $261,000 the personal exemption was phased out until $384,000 where it then was completely phased out.

In 2018 personal exemptions are gone.  Yes, you read that correctly.  The non-custodial parent is no longer able to receive the personal exemption.  Which means the desire to fight for some tax relief might be pointless.

There may be a silver lining, but it is pretty meager.

To appease those losing the personal exemption for the child(ren), Congress was kind enough to raise the Child Tax Credit from $1,000 to $2,000 per qualifying child.  That means you receive a dollar-for-dollar credit against any tax owed instead of the deduction against income for the personal exemption.

Sounds pretty nice.  I mean if your marginal bracket as 25% and you wanted to claim the $4,050 personal exemption in 2017 then you could expect to receive approximately a $1,012 tax reduction.

Now in 2018, Congress was nice enough to replace the exemption by increasing the credit which was intended to achieve the same goal…except for those in the higher income brackets.

See if you are in the 33% bracket the personal exemption would have provided a $1,336 tax reduction ($4,050 x 33%).  So technically those in the upper bracket with higher incomes, even with part of the phase-out, would have benefited from the personal exemption.

But Jonathan, the income bracket on the Child Tax Credit increased too so more people are entitled to receive it…!

Not so fast!

The income limit did increase….to $200,000 for a single filer and head of household. It is completely phased out at $240,000, which is NOT the same as the personal exemption STARTING to phase out at $261,000.

The point is, if you are the non-custodial parent you will receive a small tax break.  Instead of potentially taking the personal exemption and the Child Tax Credit (if you made less than $75,000 in 2017) you will only be able to take the Child Tax Credit… and that is if your income remains less than $240,000.

Gotta love the government trying to screw the divorced non-custodial parent who is paying alimony to his ex-spouse…

Conclusion

What does this mean?  Be prepared before you file for divorce in order to make the lives of the professionals you hire easier.  Making their life a little easier should translate into less work for them to do which should save you money — assuming they are not in the business of nickel and diming you in other ways.  During the divorce proceedings it would be wise to talk to your attorney about negotiating less alimony due to the additional tax burden you will be faced with.  Lastly, get ready for the big tax bill you will inevitably face.  When your favorite online tax calculator is updated be sure to estimate you new tax bill and brace yourself for the unsettling new reality.

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific individualized tax or legal advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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