The Need to Know About Divorce-Related Financial Issues
The Centers for Disease Control and Prevention’s National Vital Statistics System reports that in 2014, the United States saw 3.2 divorces and annulments for every 1,000 people. While this number has steadily decreased since 2000, it still constitutes almost half of the number of reported marriages (6.9 for every 1,000 people).
For every divorce that occurs, there are two people who need advice about where to start when it comes to making wise long-term financial decisions. As a trusted financial advisor, this is where you come in, so we’ve gathered a few tips and tricks to consider as you navigate your clients through divorce-related tax and financial issues.
Filing tax returns is likely something your clients seek your help with regardless of their marital status, and the complications of divorce can produce even more confusion. Before sitting down with your clients, you must understand how they will benefit from filing jointly, separately or as head of household. The best fit for your clients will depend on both their legal relationship status as well as their willingness to trust one another, and the best fit for one divorcing couple may not necessarily be the best fit for another. As a result, it is crucial to recognize the difference between these options and familiarize yourself with the tax implications of each.
Division of Assets
Divorcing clients must determine how they will divide their assets, and if you are representing both parties, it is part of your job to help guide them toward a solution that will be beneficial all around. While the seemingly clear solution would be to divide all assets in half, it is important to explore other solutions that may prove more favorable. As a trusted tax professional, you must ensure that your clients fully understand the immediate—and more importantly, the long-term—tax implications of each option presented to them before they make any hasty decisions about material goods, real estate, retirement funds and other assets.
Alimony and Child Support
Not all of your divorcing clients will need to make decisions about alimony and child support, but many will. Understanding how divorce-related tax deductions are structured is essential in helping your clients understand how their alimony and/or child support plan will affect their tax situation. For example, your clients may not know that alimony is tax-deductible for the payer and taxable income for the recipient, while child support is neither of the two. Explaining these rules to your clients will bring you one step closer to achieving a solution that will benefit everyone involved.
It is easy for couples seeking divorce often only consider what will affect them in the short-term. As a tax professional, you play a crucial role in communicating to your clients the divorce-related tax traps and financial planning that they will need to understand in order to make well-informed, long-term financial decisions. To learn more about divorce-related tax traps and tips, download Surgent’s self-study course, "How to Avoid Getting Burned in a Divorce: Tax Traps, Tricks, and Planning (DTTP)."