Mediation is a great alternative to litigation. It saves you time, money, and emotional energy. That being said, there are some cases that are more complicated to resolve than others. As a divorce mediator, my role is to provide the couple with the legal information they will need to make good decisions about their own Agreement. I cannot, however, give legal advice and I certainly cannot give tax advice. Even though the role of the divorce mediator is limited by the inability to give tax advice, we can still recognize when it is time to tell our clients to speak with their CPA, enrolled agent, or accountant. Here is a list of issues that you may need your trusted accountant’s assistance resolving:
1. Head of Household Filing Status:
In many of our mediation cases, the couple shares time with their minor children 50/50. The law states that the parent with more physical time with the minor child(ren) should be able to claim that child(ren) for tax purposes. So, when the parents are sharing time 50/50, I refer them to their accountant(s) for advice. Just like any other issue, if one person is more comfortable with the accountant, I may refer the other spouse to a separate independent accountant for advice as well. Since this issue will impact your taxes, and possibly in a significant way, it is very important that you get sound tax advice.
2. Spousal and Child Support vs. Family Support:
Family support is not typically encouraged by our office, as there are a lot of potential tax consequences to having this type of order. Basically, family support is a payment by one spouse to another that is intended to take care of the family’s needs after the divorce. The payment is not separated into specific payments for spousal support or child support. Some people choose this option for tax reasons, and there is no better person than your accountant to tell you whether it is a viable option for you or not.
On the other hand, some people do itemize their Agreement to include both child and spousal support. When they do, they should also consult with their accountant. This is because spousal support is considered a tax deduction to the payor (the person actually paying the other spouse), and taxable income to the payee (the spouse receiving the support). Child support, however, does not have any tax ramifications. Your mediator can give you a general overview on this, but it is your accountant that must advise you how to structure your support.
3. Capital Gains Tax:
When a couple is negotiating a possible sale of their former family residence during their divorce mediation, it is possible that they need to consider capital gains tax. This depends on a number of different factors such as when the home was purchased, and how much equity the parties have accumulated in the property since they have lived there. Your accountant should be able to advise you regarding whether or not you need to be concerned with capital gains tax and what you can do to plan around it.
4. Cashing Out Retirement:
Many times, one spouse intends to cash out their retirement account in order to buy another spouse out of a different asset. There are commonly tax consequences to transactions like these, and the couple should speak to their accountant about how to avoid negative tax ramifications.
5. Trading Assets:
There are often many different types of assets involved in a divorce mediation. People own real estate, investment property, stocks, bonds, retirement and investment accounts, pensions, antiques, and more. Because of how diversified some people’s investments are, it is important to consider that all assets are not created equal. Some retirement accounts, for example, are pre-tax and some are post-tax. Therefore, if someone gets a home with $100,000 in equity and the other gets a retirement account that will be taxed when they take the money out that is currently worth $100,000, these assets may not be the same. This depends on the specific tax consequences that flow to each individual asset.
When cases like this arise, our firm does two things: 1. We ask the couple to consult with an accountant(s); and 2. We get a Certified Divorce Financial Analyst (“CDFA”) involved in the process. The accountant can advise the couple about the relative value of the assets after the tax consequences are taken into account, while the CDFA can use a special computer program to create different possibilities for settlement given the differences in the assets’ value. The difference in the type of asset must always be considered for a settlement to reflect a true 50/50 split. Otherwise, you run the risk of having an unequal division of assets, or even worse, having one spouse’s financial advisor “cherry pick” the best assets for one spouse. Information is the best way to avoid unintended outcomes.
At Alternative Divorce Solutions, we are always looking for ways to provide our clients with more information, as we believe that better information leads to better choices. We spend hours each week meeting and screening different professionals that we can refer our clients to for assistance and sound professional advice.