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One of the most frequently overlooked areas of family law is that of tax consequences.  Many family law practitioners do not fully understand the in's and out's of the applicable tax laws, which can result in their clients having unwanted "surprises" down the road.  Alan Pearlman of the Chicago Family Law Blog recently published the following article, which does a great job of analyzing and explaining the major tax issues for property division, child support, and alimony that divorcing parties should consider.

Prior to filing for divorce, various federal tax considerations should be reviewed due to their potentially profound implications. Among the major issues commonly covered in a divorce decree or agreement are: alimony, sometimes referred to as "spousal" or "separate maintenance" support; division of property; and child support. Each has its own tax treatment and implications.

Division of Property

Most divorces involve a division of the property owned by the couple. Such a division of property is not usually a taxable event, i.e., neither owes taxes nor gets a deduction from income because he or she receives certain property as a result of the divorce.

There are, however, tax implications following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received such property (pursuant to a divorce) to pay taxes in connection to that property.

Personal and real property have a "basis" for federal tax purposes. The basis is usually the purchase price of the property. When the property is sold later, the amount by which the sales price exceeds the basis is called "capital gain." Capital gain is usually taxable at special rates. Thus, when property distributed pursuant to a divorce decree is subsequently sold by the receiving spouse, the receiving spouse may be required to pay taxes on the proceeds of the sale.

For example, in a divorce, the wife may receive the family home while the husband might receive stock or other investments equal in value to the house. If the house has a lower basis than the stock, when both are sold, the husband could end up with significantly more money, because he owes less capital gains tax.

On the other hand, under tax law applicable at the beginning of 2004, the first $250,000 (for individuals) or $500,000 (for couples) of the taxable gain on the sale of a qualifying personal residence is exempt from tax. In light of these tax issues, selling the house before the divorce, then dividing the proceeds, might make more sense.

Child Support

The parent who is granted custody of the child or children from the marriage, usually receives a set amount of money per month as "child support." Child support payments are not includable in the taxable income of the receiving spouse and are not tax deductible by the spouse making the payments.

If the written agreement or divorce decree orders both child support and alimony and the spouse making the payments pays less than the required total amount, for tax purposes, the child support obligation is deemed paid in full first. Only money exceeding the amount of the child support obligation is treated as alimony.

Alimony or "Spousal Support"

In general, for federal income tax purposes, alimony and "separate maintenance payments" are "deductible" from the income of the spouse paying and includable in income for the recipient. "Deductible" for federal income tax purposes means it is subtracted from a taxpayer's gross income before taxes are calculated, resulting in lower taxes. Taxpayers with a threshold amount of deductions must file a particular form with the IRS when paying income taxes and list such deductions.

Between the time a couple separates and a divorce decree is granted, one spouse may pay money for the support of the other spouse. These payments are deductible as long as they are made pursuant to a decree, court order or a "written separation agreement." In order for alimony payments to be deductible, federal tax laws and regulations require the following:

• The payments are made in cash, check or money order (no promissory notes, transfers or use of property, transfer of services, etc.) to the spouse, or to a third party in lieu of alimony at the written request of the recipient spouse, stating the payments are intended as alimony, and the request is received before the tax return is filed
• The divorce decree, order or the written agreement of the parties does not identify the payments as something other than alimony
• The spouses do not file a joint return with each other
• The spouses are not members of the same household when the payments are made, if they are legally separated under a decree of divorce or separate maintenance – separation within the family home is not sufficient
• There is no liability to make the alimony payments after the death of the recipient spouse – if part of the payment amount continues after death, that portion is not deemed alimony, and if all of the payment continues, none of it is alimony
• The alimony payments are not treated as child support

Source:  "Deductibility of Divorce-Related Payments" by Alan Pearlman, published at his Chicago Family Law Blog.

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The U.S. Department of Labor published an article which answers the following common questions about drafting Qualified Domestic Relations Orders (QDROs):

• What is the best way to divide a participant's pension benefits in a QDRO?
• How much can be given to an alternate payee through a QDRO?
• Why are the reasons for dividing the pension benefits important?
• In deciding how to divide the participant's pension benefits, why is understanding the type of pension plan important?
• What are survivor benefits, and why should a QDRO take them into account?
• How may the participant's retirement benefit be divided if the pension plan is a defined contribution plan?
• How may the participant's retirement benefit be divided if the pension plan is a defined benefit plan?
• May the QDRO specify the form in which the alternate payee's benefits will be paid?
• When can the alternate payee get the benefits assigned under a QDRO?
• What is earliest retirement age, and why is it important?

Source:  "Drafting Qualified Domestic Relations Orders" published at the U.S. Department of Labor website.  Thanks to Grant D. Griffiths for his article on this subject published at his Kansas Family & DIvorce Lawyer blog.

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Qualified Domestic Relations Orders (QDROs) are documents used to allocate retirement accounts when parties get divorced.  For people that don't regularly deal with QDROs, they can be quite confusing.  Fortunately, the U.S. Department of Labor published an article which answers many of the most common questions in great detail, including:

• What is a Qualified Domestic Relations Order?
• What is a Domestic Relations Order?
• Must a Domestic Relations Order be issued by a state court?
• Who can be an Alternate Payee?
• What information must a domestic relations order contain to qualify as a QDRO under ERISA?
• Are there other requirements that a domestic relations order must meet to be a QDRO?
• May a QDRO be part of the divorce decree or property settlement?
• Must a domestic relations order be issued as part of a divorce proceeding to be a QDRO?
• May a QDRO provide for payment to the guardian of an alternate payee?
• Can a QDRO cover more than one plan?
• Must all QDROs have the same provisions?
• Who determines whether an order is a QDRO?
• Who is the administrator of the plan?
• Will the Department of Labor issue advisory opinions on whether a domestic relations order is a QDRO?
  

Source:  "Qualified Domestic Relations Orders" published at the U.S. Department of Labor website.  Thanks to Grant D. Griffiths for his article on this subject published at his Kansas Family & DIvorce Lawyer blog.

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This is the ninth installment in the series of posts by Michael Sherman of the Alabama Family Law Blog on the steps to take when it becomes apparent that a divorce may be imminent.  His series takes an honest, practical approach in showing people how to protect their interests and make prudent preparations in such a situation.  Here is Step 9 - Avoid additional debt or major purchases:

We continue our series on practical steps to take when you are about to face divorce.  We are now to step 9 which is simple, but important:

Avoid additional debt or major purchases.

This suggestion goes hand in hand with assessing how to handle the credit accounts, but deserves its own separate mention.  If a divorce is going to happen, you want to be conservative with the finances.  It is not time to be putting in a pool, buying a new car, or buying new furniture on credit.  You want to simplify the financial situation not make it more complex. 

When the divorce occurs, one of the primary things that has to happen is for the divorce court to allocate who will be responsible for what debts.  Generally speaking, the less complex the debt situation, the easier task that will be.

I should note again, all of this is general information.  Your own specific situation may cause you to need to vary from it.  For example, there are times when you may have to get an automobile and it would be better to do it before the divorce because you won't have sufficient credit on your own after the divorce.  So, obviously you will want to get specific advice from your own lawyer - which is why Step 1 was find a wise guide (an experienced, competent divorce law specialist)!

Source:  "Divorce Preparation: Step 9 - Avoid additional debt or major purchases" by Michael Sherman, published at his Alabama Family Law Blog.

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This is the eighth installment in the series of posts by Michael Sherman of the Alabama Family Law Blog on the steps to take when it becomes apparent that a divorce may be imminent.  His series takes an honest, practical approach in showing people how to protect their interests and make prudent preparations in such a situation.  Here is Step 8 - Address the Credit Account:

We pick up with Step 8 in our series on practical steps to take when a divorce is imminent.  Step 8 is Assess how to handle the credit accounts.

If a divorce is imminent you do not want to be liable on any accounts on which your spouse has charging privileges.  It is not unheard of for an angry spouse, upon learning of a divorce, to go on a shopping spree.  Likewise, some lawyers may advise their clients to take out cash advances on joint cards to provide a cushion while the divorce is pending or to charge a large amount in lawyer’s fees on to joint cards.

You will want to consider canceling such joint accounts or at least reducing the spending limits.  If they are an authorized user on charge cards in your name, see what steps the credit card companies require to remove them as an authorized user.

Also consider home equity lines of credit. You may need to consider whether you should close it or restrict access pending the resolution of the divorce.

Whatever you do, do not neglect thinking seriously about how to handle this issue, and discuss it with your lawyer before making a final decision.

Source:  "Divorce Preparation: Step 8 - Address the Credit Accounts" by Michael Sherman, published at his Alabama Family Law Blog.

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Mother's Day is this coming Sunday.  Most everyone appreciates their mom, but have you ever considered the monitary value of what she does?  Well fortunately, someone has...

The mom pay wizard calculator at Salary.Com determined that the typical stay at home mother works 40 hours at base pay and 52 hours overtime for a total of 92 hours a week.  Mothers perform ten jobs at home, namely:

• cook
• housekeeper
• day care center teacher
• laundry machine operator
• van driver
• facilities manager
• janitor
• computer operator
• chief executive officer
• psychologist

Salary.Com also says it would take $138,095 per year to buy those services if she did not perform them.  This Sunday, tell your mother how much you appreciate her, and be glad that she never sent you an invoice!

Source:  "How Much Is a Stay at Home Mom Worth?"  by James J. Gross, published at his Maryland Divorce Legal Crier.  Thanks also to Grant Griffiths of the Kansas Family & Divorce Lawyer blog for his post on this subject.

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This is the seventh installment in the series of posts by Michael Sherman of the Alabama Family Law Blog on the steps to take when it becomes apparent that a divorce may be imminent.  His series takes an honest, practical approach in showing people how to protect their interests and make prudent preparations in such a situation.  Here is Step 7:  Assess the Financial Accounts:

We continue with our series on steps to take when divorce is imminent.  We are on to Step 7 which is Assess the Financial Accounts.

Source:  "Divorce Preparation: Step 7 - Assess the Financial Accounts" by Michael Sherman, published at his Alabama Family Law Blog.

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This is the sixth installment in the series of posts by Michael Sherman of the Alabama Family Law Blog on the steps to take when it becomes apparent that a divorce may be imminent.  His series takes an honest, practical approach in showing people how to protect their interests and make prudent preparations in such a situation.  Here is Step 6 - Establish Your Own Credit:

We are now on to the sixth step in our series on preparing for divorce.  The sixth step is: Make sure you have your own credit established.

If you do not have your own credit history, you should begin the process of establishing it now.  Obtain a gas card and a credit card.  You will need to have your own credit established after the divorce.  And, the sooner you begin the process the better.  So, don't wait until after the divorce.  You can start this immediately.

Once you've obtained the accounts, you can imrpove your credit by using the cards and then paying them off each month.  At this point, it is important that you use these cards only to the degree that you can pay them off each month. Your goal is to establish a favorable credit history, not to run up a bunch of debt.

Source:  "Divorce Preparation: Step 6 - Establish Your Own Credit" by Michael Sherman, published at his Alabama Family Law Blog.

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Once your divorce is finalized, it is time to begin laying the groundwork for your future. Finances are an important part of becoming self-sufficient and nurturing the new you. Here is a checklist of items that are important to cover when ensuring your finances are headed in the right direction.

• Establish Yourself Financially.  If you haven't already, you want to make sure you have a credit card as well as a checking and a savings account in your name. It is important to maintain or begin building your credit as soon as possible.
• Understand Your Divorce Ruling.  In order to make smart financial decisions, you need to understand fully the financial ramifications of your divorce. Will you be paying or receiving alimony? How will these payments be structured? What property or assets will you be receiving and when? Are you eligible for a portion of your former spouse's social security payments? Take time to discuss these issues with your lawyer to be sure you understand them fully.
• Pursue the Paperwork.  Pay careful attention to all details and documentation surrounding your legal and financial status. Make sure you change any beneficiary information on insurance policies or pension plans. Be sure to adapt your will, trusts or estate planning documents to reflect your current intentions for the assets they cover. Also, take the time to make sure any documents concerning power of attorney or guardianship have been updated.
• Be Insured.  Now that you are on your own, you want to make sure that you have all the necessary forms of insurance to protect yourself and your property. This includes health insurance, life insurance, car insurance and homeowner or renters insurance. Make sure all forms of insurance are in your name and that you understand the terms and conditions of each policy. Remember that you need to create a filing system for copies of all your financial documents and to keep an extra copy of these important papers in a safety deposit box.
• Educate Yourself.  You don't want to jump into major financial decisions before getting your bearings and making sure you fully understand the landscape. Many people find themselves in a situation where they are responsible for financial tasks that they never had to perform in their marriage. Take time to educate yourself and understand your financial options. Use some of the online resources listed at the bottom of this page or seek out a financial expert who can help you grasp a better understanding of your money matters.
• Audit Yourself.  You don't want April 15th to roll around only to realize you aren't sure about your tax status or what to do next. Work with your attorney and your ex to ensure any outstanding tax filings from your marital period are filed. Make sure you have the knowledge or the support of a financial expert to ensure you can continue filing your taxes on time and correctly.
• Create a Financial Plan.  After you have assessed your financial situation, made all the appropriate revisions to reflect your single status and gained the knowledge you need to manage your money, then it is time to create a financial plan that includes your budget, debt repayment and a savings/investment strategy. Depending on your financial situation, you may want to utilize the assistance of an expert to ensure you develop the best plan possible.

Source:  "Post-Divorce Financial Checklist" published at EqualityInMarriage.org.

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Military.com recently presented the following five suggestions to help you financially prepare for divorce:

1. Gather all necessary information & make copies:

In many divorce cases, one spouse generally assumes the responsibilities of maintaining the household's financial foundation, leaving the other spouse to the household's up-keeping responsibilities. During the marriage, this may seem to be a convenient partnership, but in a divorce, this tends to leave one spouse unaware of what the other spouse is doing with respect to finances such as: income, expenses, investing, credit cards, loans, family business, etc. If you are contemplating divorce, the first step you should take is to gather all financial information and make copies. It is amazing how documents come up missing once divorce is being discussed between spouses.

Getting these documents through an attorney at a later date can be quite costly. You want to have them up front, whether they're originals or copies. The types of documents you want to have are your most recent: bank statements, credit card statements, investment account statements, retirement account statements, loan applications, last three to five years tax returns & W-2's, property tax bills, mortgage statements, credit report, etc. In other words, anything that has bearing on your financial situation.

2. Accumulate some cash:

Depending on the type of divorce you may go through, the process can be potentially expensive. Once you are beyond contemplating divorce, start to save some cash each week to accumulate some liquid funds. What you know is you want a divorce, what you don't know is how this divorce will affect you financially. Not only will you need some liquid money to live on, but you could need to hire legal representation, financial experts, and/or mental health professionals to guide you through your divorce and serve as your advocate.

Establishing some cash is a necessity because you will need to pay these people in the event you need use them. Some divorce professionals will not work for you without a down payment, and the last thing you want to happen is not to be able to hire someone because you haven't planned properly.

3. Determine the type of divorce you will have & mentally prepare for it:

Not all divorces are the way they are portrayed on television, roughly 5 percent of divorce cases go to court. Not all divorce cases require hiring an attorney. In the state of Wisconsin, nearly 65-70 percent of divorce cases are “Pro-Se,” which means without legal representation. You want to have an idea of what type of divorce you will have and mentally prepare yourself for the costs.

In my experience with divorcing clients, a litigated divorce tends to be the most expensive regarding fees. If you are in an amicable divorce situation, you may not need to seek the legal support that you would in a highly litigated and disputed case. You may only need assistance with the financial aspects of your divorce. If finances are the only areas of dispute, than seek assistance from a divorce financial analyst, and after those issues have been resolved they can refer you to an attorney that will draft your settlement agreement. This saves time, money and provides for a better relationship with one another post-divorce.

There are other areas of dispute that require other professionals in a divorce. For example, let's assume that you and your soon to be ex-spouse have no real issues except placement of your children. This is a perfect opportunity to seek guidance from a child specialist and/or mental health professional to determine what scenario's are best suited for your children. Then after you come to an agreement find an attorney to review and draft the legal documents necessary to finalize your divorce.

Divorce is emotionally detrimental, the last outcome you need is for it to be financially detrimental as well. You don't want to go into the process blind and each end up with a $20,000 legal bill, when your only issue pertained to dividing retirement accounts, for example. Do your research and find out what professionals you need to minimize costs.

Here is a list of your divorce options:

• Legal Separation – best used for couples that do not want to finalize divorce for various reasons (i.e. religious, health insurance, child support, maintenance, etc.).
• Pro-Se – best used for couples with few disputes, few assets, and no children.
• Mediation – best used for couples who have issues to settle, but no reasons to go to court (i.e. financial issues, custody issues, placement issues, etc.).
• Traditional – best used for couples that are non-cooperative and want to fight.
• Collaborative – best used for couples with assets, children and disputes that are seeking an amicable divorce and guidance through a team of professionals (attorneys, financial specialists, mental health professionals, etc.) that assist them through a mediation-style process.
• Cooperative – best used for couples with assets, children and disputes that are seeking an amicable divorce and a team of professionals that assist them through a mediation-style process.

Determining this will give you an estimate of what a divorce may cost you.

4. Make a detailed list of assets, debts & monthly income before your first consultation:

After you have determined the type of divorce you will go through, prepare your current financial position and have it ready for your first meeting with a divorce financial analyst. This step will save you time and money. The more detailed you are, the more cost effective it will be for you. You also want to make sure that you have an understanding of your monthly expenses as well as income. One area that is commonly argued, is the household expenses incurred by each spouse. On your detailed list show actual expenses that can be supported by credit card and/or bank account statements. Numbers don't lie, and these documents can serve as a support item for negotiating proposed settlements and property division.

Knowing what your spouse earns in income is equally important when divorcing. You need to know all sources of income from: bonuses, cash under the table, exercised stock options, what they are deferring into retirement accounts, etc. Previous years tax returns and W-2's will have this information.

5. Choose the right type of financial professional that can give you expert advice:

When selecting a financial professional, be certain they have an area of expertise in divorce financial analysis and divorce financial counseling. Some financial professionals hold themselves out as divorce planners, but have ulterior motives such as booking new clients for asset management or tax preparation purposes. Look for the CDFA, CDP and/or CDS credentials. These credentials assure you that your financial professional is credible and competent to deal with the financial aspects of your divorce. These designation's mean that your financial professional has taken the necessary tests and acquired the education to hold themselves out as a divorce financial planner.

There are many advantages in retaining a divorce financial professional, some of these benefits are: financial analysis conducted early in the divorce process can save time and money, it can also help you avoid long-term financial pitfalls pertaining to divorce agreements, they can assist you in developing detailed household budgets and help avoid post-divorce financial struggles. Most importantly, they can reduce the amount of apprehension and misunderstanding about the financial aspects of the divorce process.

Certified Divorce Financial Analysts also provide other valuable information such as: tax consequences, division of retirement plans, continued health care coverage, stock option elections, debt reduction and much more. They can work with you individually or by collaborating with your attorney to help make financial sense of proposed settlements.

In my succeeding article I will focus on the different types of divorce, and the pro's and con's of each process. That article will explain the unique differences and help you to decide which type is of divorce process right for you.

Source:  "Top Five Ways to Financially Prepare for Divorce" by Garrick G. Zielinski, CFP, CDFA, Divorce Financial Solutions, LLC, published at Military.com.

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The Institute for Divorce Financial Analysts reports that about $50 billion a year is spent in North America as a direct result of divorce.  Divorces can range from simple to complex, but saving money largely revolves around two strategies: (1) paying less to your lawyer and (2) paying less to Uncle Sam.

The following suggestions can help you avoid wasting money as you go through the divorce process:

• Cooperate.  This is far easier said than done because feelings of bitterness and distrust are common, but most wasted money stems from emotional decisions and contentious divorces.  Your divorce will be very expensive if you need lawyers to help determine who gets the big-screen TV and flatware.
• Trim the lawyer bills. It's reasonable that price be one factor in choosing a lawyer, especially if the divorce is unlikely to end up in a court battle.  Once you hire a lawyer, use him or her sparingly. An attorney should handle court paperwork and lay out your legal rights, duties and options.
• Be prepared. Write down questions for your attorney meetings to make efficient use of your time. Remember, any drawn-out conversations will be billed at the hourly rate of maybe $250 an hour or more. When minor developments happen, don't call your lawyer each time. Instead, keep a journal and update your lawyer periodically.
• Use other professionals. Your lawyer is for legal stuff. If you need a therapist, get one. If you need a financial planner, get one. Either will be far better at giving you what you need and far cheaper than billable attorney time.
• Use free resources. Library shelves are full of books on divorce, and the Internet has a slew of Web sites. A helpful one is operated by Lee Borden at www.divorceinfo.com.  A new inexpensive book is "The IDFA Divorce Survival Guide," written by two leaders of the Institute for Divorce Financial Analysts.
• Tax considerations. The old joke is there are three parties to a divorce: the husband, the wife and the Internal Revenue Service. Cooperating spouses can structure a divorce to pay as little tax as possible, but you might need help from a tax pro.  The way you split up stocks that have appreciated by different amounts could have big capital gains tax consequence. It may not be an easy decision on who receives the child tax deduction and head-of-household tax filing status. You even may try to time your divorce to happen late in the calendar year or early in the next year, depending on the tax impact of filing jointly or as singles. And it's important to know that structuring payments as child support or alimony can have a big tax impact.
• Don't rebound. People who have been in a stagnant marriage sometimes go wild with money, dating every night and spending money frivolously.

Source:  "Keeping Divorce Civil Holds Down Cost of Breakup" by Gregory Karp, published in the Chicago Tribune.

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This is the fourth installment in the series of posts by Michael Sherman of the Alabama Family Law Blog on the steps to take when it becomes apparent that a divorce may be imminent.  His series takes an honest, practical approach in showing people how to protect their interests and make prudent preparations in such a situation.  Here is Step 4 - Prepare a Budget (or Two):

The next step in preparing for divorce is to make two budgets (one that shows the situation in the house before the divorce filing, and one that is your estimated budget for after the divorce).

Most folks don't like to prepare one monthly budget, so I know I'm asking a lot to suggest that it is helpful two prepare two of them.  There is a method to the madness though.  It is important to know what it costs to run your household currently.  Equally important is to have an understanding of what your costs of living will be after the divorce. Let’s take each in turn.

A. Know your current monthly budget

Knowing the monthly budget is important for the following:

1. In an alimony case, it is critical to show the standard of living and the financial need.
2. It is helpful in assessing specific needs of the children that may not be covered in basic child support (e.g. particular medical needs or private school expenses).
3. It will help you in planning your post-divorce budget.
4. If your spouse is self employed and under reporting his income, showing that monthly expenses exceed what they claim they make can show they are attempting to hide their true income.
5. A judge may utilize this information to determine temporary support while the case is pending.
6. You should know this stuff in order to properly manage your finances whether you are getting a divorce or not!

B.  Make an estimated budget of post-divorce expenses.

This is important for your personal planning and will likley influence your objectives in the divorce negotiations. You need to know what you will need financially in order to evaluate your settlement options or what you will ask the judge for in a trial.

This will undoubtedly take some estimating on your part. But, that is why it is called an estimated budget. It will be a work in progress. The point is to give some forethought to what your living expenses will be as you start the new chapter in your life.

C.  How to make your monthly budgets.

If you already maintain your checking account records on a software program like Quicken then the process is easy. You can simply print out a monthly budget report. If you don’t then you will need to sit down and look through your check register and/or your spouse’s check register for the past three months. This will reveal the expenses you may monthly and quarterly (divide the quarterly expenses by three and enter them in the budget as a monthly expense).

You will then want to think about any annual or semi-annual expenses you may have such as for life insurance, homeowner’s insurance, etc. and convert those to a monthly figure and enter it on the budgets also.

In setting out your budget, try to be as realistic as possible. You should be conservative in your budget (meaning don’t understate the expenses and end up stating a budget that doesn’t realistically meet your needs) without grossly overstating the budget (which a judge would frown on should the case go to court). It is admittedly a fine line. The best advice is to base it on as real numbers as possible.

Source:  "Preparing for Divorce: Step 4 - Prepare a Budget (or Two)" by Michael Sherman, published at his Alabama Family Law Blog.

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This is the third installment in the series of posts by Michael Sherman of the Alabama Family Law Blog on the steps to take when it becomes apparent that a divorce may be imminent.  His series takes an honest, practical approach in showing people how to protect their interests and make prudent preparations in such a situation.  Here is Step 3 - Make Photocopies of All the Financial Records:

Continuing our series on practical steps to take when it becomes obvious that divorce is imminent, we are now on to step 3.  Step 3 is simple, but important.  Step 3 is to make photocopies of all of the pertinent financial documents.

As you gather the important financial documents, you should make two copies of each of them.  One is for you and one if for your lawyer.  Keep your copy in your divorce notebook or file folder.  It is important to keep a list of what documents you have, what documents you still  need, and which of them you have given to your lawyer.

Each case and each lawyer may require a unique set of documents.  But, some of the common ones will include at least the following basic ones:

• Income tax returns for at least 3 years;
• Most recent pay stub showing year to date income;
• 12 months statements on every financial account (including retirement accounts);
• 12 months statements on every credit card or line of credit; and
• Deeds for all real estate owned by either party individually or jointly.

Source:  "Preparing for Divorce: Step 3 - Make Photocopies of All the Financial Records" by Michael Sherman, published at his Alabama Family Law Blog.

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This year, the deadline is April 17 for federal and state returns.

If you were recently divorced and are paying or receiving alimony under a divorce decree or agreement, you need to consider the tax implication for your 2006 federal income tax return.

Alimony payments received from your spouse or former spouse are taxable to you in the year you receive them. Because no taxes are withheld from alimony payments, you may need to make estimated tax payments or increase the amount withheld from your paycheck.

Alimony payments you make under a divorce or separation instrument are deductible if certain requirements are met. Any payments not required by such a decree or agreement do not qualify as deductible alimony payments.

Child support is never deductible. If your divorce decree or other written instrument or agreement calls for alimony and child support, and you pay less than the total required, the payments apply first to child support. Any remaining amount is then considered alimony.

For more information, go to www.irs.gov.

Source:  "Tax tip | Divorce Can Impact Taxes" published at The State.  Thanks to Warren R. Shiell of the Los Angeles Divorce and Family Law blog for his post about this article.

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This is the last portion of the second installment in the series of posts by Michael Sherman of the Alabama Family Law Blog on the steps to take when it becomes apparent that a divorce may be imminent.  His series takes an honest, practical approach in showing people how to protect their interests and make prudent preparations in such a situation.  Here is Step 2C - Determine Income (Yours and Your Spouses):

Your lawyer will need documentation showing your income (if you work outside the home) and the income of your spouse. This is important for a number of reasons, but primarily for child and spousal support.

If your spouse is a salaried employee then your job is easy. Obtain a copy of the most recent pay stub and the most recent Income Tax Return. If you do not have access to either of these, you can obtain a copy of the Income Tax Return by requesting it from the IRS.

Complete Form 4506, Request for Copy of Tax Return and mail it to the IRS address in the instructions along with a $39 fee for each tax year requested. Copies are generally available for returns filed in the current and past 6 years. You can download the form at www.irs.gov.

If your spouse is self employed, then the job of determining their income becomes much more difficult. This is why discretion about your divorce plans is important. You may want to discreetly question your spouse (or if he has one, his business partner or his partner’s spouse) about income. You can attempt to get copies of bank account statements and financial statements of the business.

Another good way to prove income and assets of a self employed spouse is to obtain a copy of a loan application or net worth statement that they may have submitted to a bank or other lending institution for a loan.

Sometimes it is difficult to prove the actual income of a self employed spouse. At this point, gather the information you can. In the case of a self employed spouse, your lawyer will likely have to help you by using the discovery process to obtain and analyze additional information.

Source:  "Step 2C - Determine Income (Yours and Your Spouses)" by Michael Sherman, published at his Alabama Family Law Blog.

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Divorces can be complicated and messy, both from a personal and a financial standpoint.  Forbes  published an article a couple of years ago which listed financial mistakes that everyone should try to avoid.  Here is their list, with my comments about each point listed afterward:

• Having unrealistic expectations. Parties often forget that their living expenses typically double when they separate.  The same income(s) now must support not one, but two households, and it is not uncommon for things to get tight for a period of time.
• Not communicating.  It is extremely important that clients give their attorney all of the necessary information about their case, and not just the information that they think the attorney needs to know.  Those "little" things that the client thought that no one would ever find out or that really didn't seem that important can result in disasterous consequences for the clients if their attorney is blindsided with them at trial.
  
• Getting into an endless battle. Some divorcing spouses fight in Court because they want to fight.  Either they can't get past their own emotional hurt from the divorce itself, they want to make their spouse's life miserable, or they just enjoy turmoil, stress, and fighting.  Parties would be well served to fight only those issues which truly need to be fought and act reasonably throughout the process.
  
• Getting hung up on the numbers.  It is important for the marital estate to be divided fairly between the parties, which generally means an approximately equal distribution.  However, there will always be some assets which would be better going to one spouse than the other, and in some cases it makes sense to use a different distribution to accomplish other necessary goals.  For instance, one spouse may benefit from taking less of the marital estate in exchange for a larger amount of spousal support (alimony).
  
• Focusing on the present and not on the future.  The financial issues in a divorce affect both parties long after the divorce is over.  Parties should realize that when they are attempting to get as much as they can by way of assets that there are often debts and other expenses that accompany them.  It makes no sense to fight to get something that you truly can't afford to keep in the long run.
  
• Forgetting to assess tax.  Many issues in divorce cases have tax consequences, and many of those do not show up until after the fact.  Examples can include alimony payments,  dependency exemptions, and captial gains issues. Parties are well served by having an accountant available to discuss these issues before it's too late.
  
• Overlooking important information.  It is important to make sure that everything in your divorce case is addressed and thoroughly analyzed by your attorney.  For instance, are you sure that your spouse doesn't have a retirement account with his employer and/or are you sure that the balance is what he/she says it is?  Let your attorney obtain the necessary information directly from the source to verify it authenticity and accuracy.
  
• Failing to untangle all joint finances.  The sooner you can separate yourself financially from your spouse, the better off you will typically be.  If your spouse fails to make a timely payment on a joint debt, that stain can show up on your credit report.  Likewise, you may still be liable to the lender if your name is on that account and your spouse doesn't pay.
  
• Failing to take into account the amount of time you'll to get your career back on track.  In many marriages, one (or both) spouses have made career sacrifices -- either for each other or for their children.  In these situations, it takes time for that spouse to be in a position to earn an income comparable to the other spouse, if ever.  Keep this in mind when you are going through a divorce, because in most cases, the parties do not have an equaly financial standing at the outset.
  

Source:  "Top Financial Divorce Mistakes" by Leah Hoffmann, published at Forbes.com.

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Breaking with every other state that has considered the issue, the New Hampshire Supreme Court recently held that employer-provided housing, vehicle, and receipt of other in-kind benefits were not includable in "gross income" under its child support guidelines for purposes of calculating a child support obligation.  The Court found that since these benefits were not paid in money, they did not share one of the primary attributes of items listed as "gross income" in the guidelines. The receipt of such items may be considered as the special circumstances and be sufficient cause for deviation.  You can download a copy of In re Clark by clicking HERE.

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Your income tax returns are not due for another four and a half months, but there are several things you can do this week to help minimize your tax exposure.  You may want to consider the following year end tax tips from Turbo Tax:

1. Defer Income - Income you don't receive until after midnight on New Year's Eve isn't taxed until the following year. Even if you'll be in the same tax bracket, you win by putting off the tax bill.
2. Exploit Last-Minute Deductions - Contributing to charity is a noble way to get a deduction. And you control the timing.
3. Beware of the Alternative Minimum Tax - Sometimes accelerating deductions can cost you money… if you're already the alternative minimum tax (AMT) or you inadvertently trigger it. Originally designed to make sure wealthy people could not use legal deductions and congressionally created loopholes to drive their tax bill to zero, or close to it, the AMT is now increasingly affecting the middle class.
4. Sell Loser Stocks to Offset Gains - Since it's up to you when to sell securities – and convert paper gains and losses to real ones – you can mix and match your trades to deliver the tax outcome you desire.
5. Do a Bond Swap - The point of this year-end maneuver is to lock in a tax loss by selling bonds that have fallen in value (usually because market interest rates have risen) and reinvesting the proceeds in other bonds. Done right, you can maintain the income stream from your bonds.
6. Don't Buy a Tax Bill - Mutual funds often pay out most of their capital gains and dividends in December. Don't think you're getting a windfall if you buy just before then. It's a tax mistake.
7. Contribute the Maximum to Retirement Accounts - Bump up your 401(k) contribution so that you are putting in the maximum amount of money allowed ($15,000 for 2006 and $15,500 for 2007, so start early). If you think you can't afford it, run the numbers.
8. Give Money Away - You can give away as much as $12,000 a year to any number of people without triggering the federal gift tax. The tax-free amount doubles to $24,000 if your spouse joins you in making the gift.
9. Check IRA Distributions - If you have reached age 70-1/2 (or if your parents have), remember that the law demands that payouts must be made from traditional IRAs after the owner reaches that age.
10. Check up on Your Flexible Spending Accounts - The catch is the notorious "use it or lose it" rule. You have to decide at the beginning of the year how much to contribute to the plan and if you don't use it all by the end of the year, you forfeit the excess.

The article at Turbo Tax discusses these issues in greater detail.  As always, you should consult your CPA or tax adviser to ensure that these tips are appropriate for your specific situation.

Source:  "10 Year-End Income Tax Tips" published at the Dumb Little Man blog.

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AskMen.com published an article which discussed the basics of child support.  This article was aimed at men, but the principles discussed are gender neutral and apply equally to mothers and fathers.  You can read the full article by clicking here, but I have listed the highlights below:

• A DNA test is your best bet
  Paternity should almost always be the first question when it comes to child support.  Failure to request a paternity test could result in you paying for a child that is not yours. 
  
• Men can get child support
  Generally, the parent that has the child most of the time receives the child support payments.  Most people assume that the mother always gets custody, but that is not the case.  In fact, in an ever-increasing number of cases, the father receives custody.
• Child support is determined by a formula
  The factors used in the formula vary from state to state, but they generally include the parents' incomes, healthcare expenses, and day care expenses.  Almost every situation is different, and when it comes to comparing child support, you’re talking about apples and oranges.  A good attorney will ensure that the correct factors are used and that your child support is calculated correctly.
• You can make a private agreement with your ex
  A child support agreement doesn’t have to be created by the court. In fact, courts in most states would prefer people to work it out themselves. But for the agreement to be considered legal, it needs to be put in writing, signed and approved by the court.
• The court doesn't control how the money is spent
  A common complaint is that the parents receiving the child support spends the money on themselves.  It is important to understand that the money paid doesn’t go directly to the child, nor does all of it need to be spent on the child.  Just think, married parents don't give their paychecks (or a percentage of it) directly to their children.  The courts are concerned that the child's needs are met and that the child is not in harm's way.
• You can modify child support agreements
  Child support obligations can be recalculated when there is a change in circumstances.  Generally, you will be required to petition the court to do so, but it can be done if you can legitimately prove why it is necessary.
  
• A lower salary won’t change your obligation
  Believe it or not, some parents actually lower their own salary intentionally, with the belief that they won’t have to pay child support anymore.  Fortunately, the Court will not allow such attempts to hurt the kids.  In cases where this occurs, income is typically calculated based on  that parent's potential income (or earning capacity).
  
• You are responsible even if it was a one-night stand
  Marriage isn’t necessary for child support; only a child is required.  From a child support perspective, a one-night stand is the same as having a wife or a girlfriend, and the only question is paternity. 
  
• Step-parents aren't legally responsible
  If it’s not your biological offspring, you don’t pay. However, if you adopt the kids in the marriage and later divorce, the child is legally your responsibility and the Court will treat you just as if you were the child's biological parent.
  
• You don't get a tax exemption
  According to the IRS, the custodial parent gets to claim the tax exemption for the child, and not the parent who pays child support.
  
• Deadbeat parents can face state sanctions
  Deadbeat parents cost states a lot of money in administration.  Many states suspend the licenses of parents who don’t pay child support, and the licenses can range from the simple driver’s license to a business or law license.
• Child support usually ends at 18
  At the age of 18, one is considered an adult in the eyes of the law. At that point, child support comes to an end, unless they are still enrolled in high school. However, the date at which child support terminates varies widely from state to state, and you should consult an attorrney to find out the particulars for your state.

Source:  "Paying Child Support 101" by Michael Estrin, published at AskMen.com.

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One of the questions that family law attorneys are frequently asked is under what circumstances can a non-custodial parent claim a child as a dependent on his/her income tax returns.  Fortunately, the  Family Law Taxation blog has published the following article, which addresses that very issue in great detail:

Non-Custodial Parent's Deduction for Dependents: Tax Court Denies Dependency Deduction for Non-Custodial Parent Because Taxpayer Did Not Include a Signed Form 8332 With His Return

The tax consequences of separations can impact a number of areas. One such area is the deduction for dependents.

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If you are concerned about the growing incidents of identity theft, I recommend the following post from Trent Wilcox of the Arizona Divorce & Family Law blog:

It’s beginning to look a lot like . . . well, like the winter holidays, with all the gift-giving and –receiving opportunities that abound. Gift lists grow ever-longer and more specific, and the giver’s thoughts turn to long hours and longer lines at the mall, fighting for this year’s version of the last Furby or Cabbage Patch Doll on the shelf. Wouldn’t it be easier to log onto the Web and shop in your jammies, humming along with your Christmas tapes? But what about identity theft? Could you unwittingly be handing over your life to some scammer?

It is possible—but not as likely as the hype may lead you to believe. In the report prepared for the Federal Trade Commission in 2003 by Synovate, approximately 4.6 percent of the population experienced some form of identity theft in 2002. In the same report, it was determined that in twenty-five percent of all identity thefts reported, the thief obtained the information through theft of a purse or wallet.

So your chances of experiencing any form of identity theft are one chance in twenty. And if you are one of the unlucky ones, you have a one in four chance of having been taken when someone lifted your wallet or purse.

How else does your information get captured? Do you shred your credit card statements, or do you just toss them in the garbage? If you leave them whole, that gives a thief your name, address, and account number. If you put them in a desk drawer, someone could remove them from that drawer. And do you know where the waiter goes with your credit card when he goes to swipe it? Are you sure he’s not making notes on a post-it, just in case he feels your tip is too small? There’s more to identity theft than the Internet.

What do you do when you realize that something’s gone wrong? For most people, the main concern is with misuse of an existing credit card account. With good reason too—according to Synovate’s 2003 report, misuse of an existing card accounts for over half the incidents of reported identity theft.

First and foremost, report the loss or theft of a credit card to the issuer immediately. This can limit your liability dramatically, often to a cap of $50.00 per card. Close any accounts you know were tampered with and open new accounts with new passwords. Don’t choose something obvious like a string of consecutive numbers, your mother’s maiden name, parts of your Social Security Number, or names of children or pets. Then file complaints with your local police and with the Federal Trade Commission. Finally, place a fraud alert on your credit report.

Speaking of credit reports, they are one of the best tools for making sure accounts are not being opened in your name without your knowledge. You are entitled to one free credit report every twelve months—just for asking. Peace of mind makes a nice holiday gift to yourself.

Source:  "Identity Theft" by Trent Wilcox and Beth Rees published at the Arizona Divorce & Family Law blog.

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Financial issues are present in virtually every Family Court case.  Those clients who have a handle on their financial status do their attorneys a great service, because they allow the lawyer to focus on what to do with those numbers from the very beginning. 

Think about it this way, would you rather have your attorney spend his time (and your money) tracking  down all of your financial information or thinking about how best to attain your desired outcome (such as preserving your assets, ensuring that the marital debts are fairly allocated, getting a reasonable alimony award, or making sure that child support is calculated correctly).

In South Carolina, all parties in Family Court are required by Rule 20 of the Family Court Rules to file a Financial Declaration at the earlier of (a) the first hearing or (b) 45 days after the Complaint is served.  The Financial Declaration lists the party's monthly income, monthly expenses, and assets.  You can download a blank Financial Declaration in either Word format or *.pdf format.

Another tool that litigants might find helpful is a monthly budget which shows their income, fixed expenses, and variable expenses.  A simple, but useful, spreadsheet can be downloaded here.  This spreadsheet can help a party identify areas in which he/she can make adjustments, if necessary, to handle unexpected expenses and/or pay down additional debt.

I give my clients specialized worksheets to get the necessary financial information to help me help them.  One such worksheet collects the income/expense information I need to prepare the Financial Declaration, and the other gives me information about their assets and debts. 

Thanks to Of Zen And Computing for its post providing the budget spreadsheet referenced above, and thanks to LifeHacker for its post referencing same.

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Michael Sherman of the Alabama Family Law Blog recently addressed the following question:

Are the fees I pay my divorce lawyer deductible?

Only those fees paid to your divorce lawyer that are directly attributable to tax advice and/or related to the production of taxable income (such as alimony) can be deducted.

You may want to ask your lawyer at the conclusion of the case if she can give you a breakdown of what portion of the fee you paid her, if any, was related to tax advice or the production of taxable income.  If the case does not involve alimony or other tax issues (for example, the sale of a house or stocks or the division of a retirement account), you may not be able to deduct any of the fee.

If you have specific quesitons related to this issue in your case, talk to your lawyer or tax advisor.

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In a decision issued earlier this week, the South Carolina Supreme Court made it clear that a bad faith motive is not required as a prerequisite to proof of voluntary underemployment for purposes of imputing income when calculating child support. 

The presence of bad faith is a factor in determining whether a parent is voluntarily underemployed, but the lack of such bad faith does not preclude a finding of voluntary underemployment.  You can read the full text of Arnal v. Arnal by clicking HERE.

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Credit card holders are often left confused about the true cost of transactions, according to a study by the Government Accountability Office. Their report shows customers of the six largest credit card issuers are unclear about penalties, variable interest rates, and other fees.

Sen. Carl M. Levin (D-Mich.) requested the study, said it shows not only that disclosures are inadequate, but that major credit card companies often engage in unfair and deceptive practices that need to be stopped.  The report is considered to be the most comprehensive study of credit card companies' fees and pricing practices. 

You can download a complete copy of the Government Accountability Office report by clicking HERE.

Source:  "Credit Cards' Hidden Costs" by Kathleen Day, published at The Washington Post.

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It should come as no surprise that divorces can lead to financial strains and difficulties.  Anytime you go from one household with two incomes to two households with two incomes, things can get very tight very quickly.  It can be helpful to know how to deal with creditors, and these are five of the most common mistakes to avoid from Families.com:

1. Avoiding the creditor. You should resist the natural tendency to want to avoid people to whom we owe money when we cannot pay them.  Refusing to talk to creditors can lead them to act more aggressively than if you cooperate.
   
2. Refusing to give details. When you speak with your creditors, chances are they are going to ask some probing questions about your employment, expenses, and personal circumstances. Explaining your situation may convince creditors to reduce interest rates, reduce minimum payments due, or in some cases settle debts.
   
3. Thinking of their creditor as an opponent. Try not to forget that you and the creditor both want to reach a successful resolution with regard to this debt.  Both of you would prefer that you not file bankruptcy and that you find a solution that will allow you to make payments you can afford while avoiding (further) delinquency and mistakes.
4. Playing tough. It is should be obvious that swearing, yelling, and name-calling are not productive. While you should be aware of the protections afforded to you by the Fair Debt Collection Practices Act, you should be careful alleging that the creditor is violating it unless you are certain that it is.  Finally, do not tell a collector to "just do what you have to do," as it may provoke further action sooner than is necessary.
   
5. Not following up with the agreements they make. If you are able to reach an agreement with your creditor to amicably resolve the debt, be sure to follow through on your end.  Failing to do so will likely be interpreted as a lack of good faith on your part.
   

Source:  "Five Common Mistakes People Make When Dealing with Creditors" by L Robbins, published at Families.com.  Thanks to Grant D. Griffiths of the Kansas Family Law Blog his post pointing out this article.

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The SC Court of Appeals recently issued a decision, LaFrance v. LaFrance, which contains a very thorough analysis of when and how income should be imputed, particularly with regard to child support calculation purposes.

In this case, the Family Court found that the husband was "either not employed or significantly underemployed" and that he "has the ability to earn in the lower range of the senior level salaries, or about $100,000.00 per year." 

The husband claimed that he was unable to earn that income because of a downturn in the telecommunications industry in which he previously worked; a lack of local job opportunities in his former field; and his numerous health problems. 

The Court pointed out that for calculation of child support under guidelines promulgated pursuant to section 43-5-580(b) of the South Carolina Code, income is defined as “actual gross income of the parent, if employed to full capacity, or potential income if unemployed or underemployed.” 27 S.C. Code Ann. Regs. 114-4720(A)(1) (Supp. 2005). 

Regarding the imputation of income, the guidelines provide:

If the court finds that a parent is voluntarily unemployed or underemployed, it should calculate child support based on a determination of potential income which would otherwise ordinarily be available to the parent . . . .

(b) In order to impute income to a parent who is unemployed or underemployed, the court should determine the employment potential and probable earnings level of the parent based on that parent’s recent work history, occupational qualifications, and prevailing job opportunities and earning levels in the community.

The Court of Appeals then anaylzed many decisions both from SC and other states dealing with the issue of imputation of income.  In the end, it reversed the amount of imputation of income and remanded the case for a calculation of imputed income consistent with its opinion. 

Other issues discussed in this opinion are (1) the parties’ contributions to the marriage; (2) the invasion of Husband’s assets for temporary support; (3) the award of the marital home to Wife; (4) Husband’s share of children’s private school tuition; (5) Husband’s share in future profits from the sale of the marital home; (6) the classification of Wife’s jewelry as marital property; and (7) the award of guardian fees in the Supplemental Order.

You can read the full text of LaFrance v. LaFrance by clicking HERE.

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William Donaldson, CFP, CDFA and Adam Westphalen, CFP, CDFA wrote an article, "Divorce and Your Finances - The 7 Most Costly Mistakes," for WomansDivorce.com which outlines some major areas to consider in your divorce settlement.  They listed these seven mistakes as:

1. Not Knowing the Liquidity of Assets
2. Failure to Consider the Impact of Taxes
3. Not Understanding the Rules of Retirement Accounts
4. Overlooking Debt and Credit Rating Issues
5. Not Maintaining Control Over Insurance Policies
6. Failure to Budget
7. Failure to Identify Hidden Assets

You can read the full text of their article by clicking HERE. 

Thanks to Janet Langjahr of the Florida Divorce Law blog for her post on this article.

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You can receive benefits on your ex-husband's Social Security record if he is receiving Social Security benefits (or is deceased) and:

• your marriage lasted 10 years or longer;
• you are presently unmarried;
• you are age 62 or older (if he is deceased, you can collect benefits at age 60 or age 50 if you become disabled); and
• you are not entitled to an increased benefit on your own record which exceeds one-    half of your ex-husband's unreduced benefits.

If your ex-husband has not applied for benefits, but can qualify for them and is age 62 or older, you can receive benefits on his record if you have been divorced from him for at least two years and meet the requirements listed above.

If your ex-husband is deceased, you can receive benefits on his record even though you were not married to him for 10 years --

• if you are caring for his child who also is your natural or legally adopted child and is under age 16 or disabled;
• you are unmarried; and
• you are not entitled to an equal or higher amount on your own record.

Your benefits will continue until the child reaches age 16 or the child's disability ceases.  The amount of benefits you receive as a divorced spouse does not affect the amount of benefits another spouse receives on your ex-husband's record.

Many women get a higher benefit based on their ex-husband's work record than they get on their own record, especially if he is deceased. If you've never asked Social Security about receiving benefits on your ex-husband's record, you should do so. When you apply, you'll need to give his Social Security number. If you don't know his number, you'll need to provide his date and place of birth and his parents' names.

Note:  The same conditions apply to a divorced husband whose eligibility for benefits is based on his ex-wife's Social Security record.

Source:  "Social Security - Divorced Woman's Guide" by Grant Griffiths at the Kansas Family & Divorce Lawyer blog, citing