Divorce during the tax season: some considerations

If you are in the process of securing a divorce during tax season, your yearly tax return can be extra stressful. Depending on your circumstances, it may make sense to still file jointly, but your attorney or a tax accountant can help you determine the best strategy.

There are pros and cons of filing a joint return even as you work through the divorce process, because in many cases, depending on your incomes, deductions and credits, your tax burden will be lower when you file jointly. However, one big consideration you should keep in mind is that both you and your-soon-to-be ex are jointly and severally liable for any payments, deficiencies, interest, or penalties for that joint filing. So filing jointly can still make sense for some couples.

If, however, you don’t want to file jointly, you may still file separately or as the “head of household.” The later is only applicable when a number of factors are present: your spouse did not live with you for the last six months; you can claim a dependent exemption; you paid more than half of the cost of maintaining the house; and the house was your main residence for more than half the year. If you’re uncertain if you meet any of these circumstances, discuss your situation with your attorney.

Regardless of where you are in the divorce process, you should discuss your tax situation with your attorney and a tax accountant before filing.

Divorce for small business owners: what to know

One of the most troubling things that can happen to a small business is the divorce of one of its founding partners, or in the case of a family business, the divorce of a company’s co-founders. If you’re a small business owner contemplating divorce, there are a handful of things you should consider before you begin the process.

1.      Be clear with yourself. Before you begin the process, ask yourself what you’re willing to sacrifice, what you aren’t willing to compromise on, and what costs you think your business can withstand. Also, as the process begins and wears on, be prepared to continually reevaluate the costs the divorce is taking on you and your business so that you can take appropriate action.

2.      Find the right attorney. Make sure, before you begin the divorce process, that your attorney understands what you want out of the situation and what you’re willing to sacrifice to get it. If you don’t have frank conversations with your attorney, you may end up spending unnecessary time and money on the divorce process, which can ultimately hurt your business.

3.      Use additional resources. Many small business owners surround themselves with a team of advisors — use them as you work through your divorce. Financial advisors, mentors, trusted associates, friends and family can all provide valuable insights during your divorce. Use them when you need to.

4.      Hire experts. In addition to utilizing your personal network and working with the right attorney, a business valuation expert can help you save time and money when it comes to evaluating the value of your business.

5.      Prepare for the lasting effects of the divorce. The process may take a year or more, but the long lasting effects, both financial and emotional, can take much longer, so be prepared to deal with the continued effects.

Here’s a useful article on the topic if you’d like to learn more.

What should I know about real estate during my divorce?

If you and your spouse are contemplating divorce, it’s important for you both to understand that when it comes to real estate, the process can be fraught with complicated questions and scenarios. Colorado is a marital property state, meaning that any joint property of the couple will be equitably divided during the divorce.  Equitable division is not necessarily equal division, as the court will consider the economic circumstances and the earning potential of both spouses when it makes the division.

When it comes to real estate, there are a few things to keep in mind as you work through your divorce, namely, understanding the value of what you’re dividing. After determining which property is marital property, the couple, or the court, will assign a monetary value to each item. If you need help determining values, you and your soon-to-be-ex should consider hiring professional appraisers.

Here are a few things to know about dealing with real estate appraisals:

1.      Most real estate values are based on comparable sales in your area.

2.      Every appraiser will have his or her own evaluation style, meaning there can sometimes be big differences in the values they provide (e.g., one appraiser may focus on the value of external landscaping, while another will focus on interior improvements).

3.      Real estate values can change drastically depending on the market, so the equity you have in a home may not directly translate to a profit if the real estate market isn’t strong.

4.      And don’t forget that an appraisal is only part of the story; to quantify your equity in the home, you’ll need to take the appraisal value and subtract any mortgages or liens that are on the home.

If you’d like to learn more, here’s an article from Forbes Magazine. You should also have a list of questions for your attorney as you navigate this process.

How will my retirement accounts be divided in my divorce?

Retirement savings, including 401k or IRA plans, are often the subject of discussion when couples are contemplating divorce. In general, courts consider retirement funds added during the course of a marriage — and funds accrued during a marriage — as marital property, which means they can be divided as part of a divorce.

Depending on the type of retirement accounts you have, the court will use a number of factors to divide them. There are two types of retirement savings: qualified and nonqualified. Qualified plans include work retirement plans like pensions or 401ks. Nonqualified plans include IRA and Roth IRA plans.

There is typically a penalty when you attempt to withdraw money early from these plans, but Congress has relaxed the standards for divorcing couples.

For most qualified plans, the court will issue a qualified domestic relations order that specifies how the account will be split. The party who is seeking funds from the other party’s retirement savings is then responsible for reaching out to the company that manages the account. The spouse who is seeking the funds typically has a few options: leave the funds under the same management but in a new account; direct rollover of the funds into the spouse’s own retirement account; take a lump sum before a rollover, which can also be taken in the form of cash. Depending on your financial situation, it may make sense to do any one of these options, but you should consult with your attorney and financial advisor before acting.

For non-qualified plans, like an IRA, the non-participating spouse can either change the name on the account to his or her name or can receive a direct transfer of funds to his or her own accounts.

Regardless of whether you’re holding retirement accounts or seeking them from your soon-to-be-ex, your attorney and financial advisor can help you navigate the process.