Recently Divorced? Here’s Why You Should Put Aside Your Differences Come Tax Season

Divorce can wreak havoc on your finances. But what many divorced couples don’t realize is that they can expect to face recurring financial challenges during tax season for years after the divorce is finalized. While divorce is often adversarial, leaving both spouses with animosity in its wake, tax season is an opportune time to put aside those differences and cooperate to reach a mutually beneficial outcome.

Filing taxes in the midst and even after divorce can be complicated. Even after a divorce, many couples retain financial ties in the form of ongoing support, shared assets, lingering retirement plan divisions, and tax breaks, all of which can significantly affect tax liability. You can avoid another bitter battle by sitting down with your ex-spouse—and ideally a trusted lawyer—to discuss a few key issues.

Will You File Jointly or Individually?

Couples in the midst of a divorce can file “married filing jointly” or “married filing separately.” Each filing status has its pros and cons, so you should only make this decision after consulting with a lawyer and a tax advisor.

Couples with a divorce finalized before the New Year have to file separately, so consider delaying the finalization of your divorce until after December 31st if you’d like to reap the benefits of filing as a married couple.

Whatever you do, don’t wait until tax season to decide how to file, and don’t decide without consulting with your spouse. Coordinating your filing status can be advantageous to both parties if you plan ahead.

Who Claims the Children?

This is another important issue worth determining before tax season. Typically, the divorce judgment will include a stipulation on who gets to claim the children and the associated credits or deductions. Many couples choose to take turns by alternating years or each claiming one (or more) child individually . But if you don’t already have this determined in a court order, you might need help determining which parent has the most to gain one way or the other. In general, primary custodial parents have the right to claim the children, however in the case of shared custody, that right can fall in either direction. Likewise, divorcing couples that are filing separately will need to make this decision, but it is best first to figure out whom the claim will benefit the most before you decide.

How Will You Handle Dividing Your Assets?

Not all types of property divisions are tax friendly. Make sure you consult with a lawyer before you put your property division in writing to ensure the spouse who receives the assets is not met with an undue tax burden come tax season. This is more of concern for couples in the midst of a divorce, but divorced couples can run into issues about jointly held assets (such as the family home), too. And failing to include a stipulation regarding jointly owned assets in the judgment can create trouble.

The spouse who retains residence of the family home doesn’t necessarily get to claim all the tax benefits, especially if he or she is not financially responsible for the home. Cooperation is essential in this matter. The division of retirement accounts can also affect your taxes. Make sure you file a Qualified Domestic Relations Order to divide plans without penalty. Liquidating the accounts to divide them will result in penalties and a higher tax liability.

How Will You Characterize Support?

Orders for alimony (also called spousal support or spousal maintenance) and child support are common in many divorces. Child support has no bearing on tax liability and cannot be deducted. Alimony, however, is a little more flexible. Alimony is typically taxed as income to the receiving spouse and a deduction for the paying spouse, but the wording in your judgment can affect this. Work with a lawyer before you finalize your divorce to ensure your alimony order will be mutually beneficial to you and your spouse.

If you’re divorced and need financial guidance, consider sitting down with us. As your Personal Family Lawyer®, we can help you strategize your tax filing for maximum benefit this tax season.

This article is a service of Gratia P. Schoemakers, esq. We don’t just draft documents, we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.  That’s why we offer a Family Wealth Planning Session™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. Begin by calling our office today to schedule a Family Wealth Planning Session.

Estate Taxes in President Trump’s America

President Donald Trump has proposed a radical tax reform agenda for his presidency. Part of this reform is his intention to repeal the estate tax. For some people, this will be a considerable change with significant repercussions. But, because more changes to the tax code are anticipated, high-net-worth families should consider what this change could mean for their estate plans.

The estate tax (aka the death tax) is a federal tax on the transfer of property in the estate of someone who has passed. Upon death, your estate’s taxable value is assessed and then taxed. There are many rules on when and how the estate tax can be taken, but Trump plans to repeal the estate tax altogether.

Comparatively, the estate tax is not a huge revenue producer for the IRS, and many believe the estate tax is baseless, while other forms of property transfers between family members are untaxed, such as property divisions as the result of divorce.

While many applaud the suggested repeal, it’s important to remember that lost revenue will be certainly be gained elsewhere. Though the estate tax may be abolished, Trump still plans on initiating a capital gains tax on any assets left to heirs over the $10 million threshold.

Some argue that the estate tax only affects the very wealthy. Indeed, the 2017 federal estate tax exemption is $5.49 million. Estates valued below that threshold will not be taxed. For families with significant wealth, steps should be taken to plan for a potential estate tax, even if the estate tax is repealed because it’s likely to return in the future, even if it is repealed now.

Basing estate plans on proposed tax reform is unwise. However, considering proposed tax changes as well as the changing political climate while planning your estate will help you make educated decisions. Regardless of the size of your estate, now is a great time to sit down and discuss your estate planning options with a Personal Family Lawyer®.

Proper planning for your estate means staying abreast of changing tax regulations and ensuring your estate plan minimizes its tax burden and protects the assets you will leave behind. Because tax regulations are not set in stone and change quite frequently, it’s important to work with a Personal Family Lawyer® to prepare for all eventualities.

And, of course estate planning is about so much more than just saving taxes, and even about so much more than just your financial estate. As your Personal Family Lawyer®, we see estate planning as about helping you make the very best personal, financial and legal decisions for your wealth, health and happiness throughout your lifetime and then being there for your loved one’s to minimize conflict, when you cannot be.

This article is a service of Gratia P. Schoemakers, Personal Family Lawyer®. We don’t just draft documents, we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.  That’s why we offer a Family Wealth Planning Session™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love.

Call our office to schedule a time for a private conversation about your family wealth via a Family Wealth Planning Session, where we can identify the best ways for you to ensure your legacy of love and financial security for your family.

Got a Job? Here’s How You Can Save Money You Might Be Losing Right Now

Did you know there are many steps that you can take to save money via your employment?  Some of these strategies work by allowing you to pay for things with pre-tax money, which could up to 40% (depending on your tax bracket) right back into your pocket.  Others provide benefits through your employer that are not taxable to you on your individual income tax return, again reducing your tax liability.

Saving through Pre-Tax Contributions

There are several ways you can save money at work by paying for things out of your gross income (that is your pre-tax income).  Perhaps the three most significant pre-tax expenses you can pay for through your employer are 401(k) contributions, medical flexible spending accounts (“FSA”), and dependent care reimbursement accounts.

You can make retirement contributions to either an employer-sponsored 401(k) plan or to a traditional individual retirement account, tax-free.  In addition to saving money in the short run by decreasing your taxable income, you’ll be building a nest egg for your later years. You will pay taxes when you take money out of the account, but we always suggest to defer taxes when you can.

In addition to contributions to a retirement account, the regulations of the Internal Revenue Service also allow for both medical flexible spending accounts and dependent care reimbursement accounts.  With these types of accounts, you contribute pre-tax money, effectively securing a discount on eligible medical or dependent care expenses.

Saving through Nontaxable Benefits

Pre-tax expenses are not the only way your job can help you save money, however.  The Internal Revenue Service allows employers to provide their employees with many benefits that are not taxable to the employees.

Here are several benefits your employer can provide, which you do not need to report on your individual tax return:

  • Employer-paid health insurance premiums;
  • Employer-paid parking, to a maximum of $240 per month;
  • Health club access for a gym on your employer’s property;
  • Employer-paid educational classes, up to a maximum of $5,250; and
  • Employer-paid life insurance coverage, up to a maximum of $50,000 in benefits.

You might be surprised at the number of savings opportunities you can leverage from your employer.  In addition to providing a paycheck, your employer can improve your financial condition in many other ways.  And over the course of a career, the savings can really add up. It may be time to talk with your employer about providing some of these benefits.

By the way, if you own your own business and set your business up properly, you can be the employer providing yourself with these benefits. Contact us to discuss the possibilities.

This article is a service of Gratia P. Schoemakers, Personal Family Lawyer®, who develops trusting relationships with families for life. That’s why I offer a Family Wealth Planning Session,™ where I can explain various financial tools and other alternatives to help identify the best strategies for you and your family. You can begin by calling our office today to schedule a time for us to sit down and talk because this planning is so important.

 

 

 

Watch Out for Predatory Tax Liens on Your Family Home

As our parents and other loved ones age, they may need a little more attention from us. Parents, grandparents, aunts and uncles, or even neighbors who are aging may want to be seen as strong and independent. Often, however, their abilities to take care of household and financial affairs begin to erode as they get older.

 What’s at Risk?

One such example  which can have catastrophic consequences is the failure to pay property taxes. A lot of retired people struggle to make ends meet and may not be able to pay their taxes as they come due. This puts their home at risk because unfortunately, governments have processes in place to collect back taxes by placing liens against the property.

 Worst Case Scenario

Different locales have different approaches to filing liens against property, but one place where it has become predatory is Washington, D.C. There, the city made a policy change in 2001 that has had devastating effects on homeowners. Prior to that time, the city would sell a lien at auction to individuals who could then charge interest on the amount due until it was paid. If it was not paid, the city could move to foreclose on the property.

The change in 2001 allowed the purchasers of the liens to go directly to court to foreclose on the property they purchased. This attracted predatory lenders from other states that became very aggressive in pursuing the foreclosures. In many cases, people who owned their homes free and clear lost them over unpaid taxes of less than $500. Once the investors buy the liens, they can begin charging interest and legal costs, which often causes the homeowner to be less likely to be able to pay off the lien.

It is true that homeowners have ample time and notice to pay the taxes, even after the liens are sold, but Washington’s story is replete with cases of owners with dementia and other serious illnesses. Because of these types of conditions, many owners were not aware of or did not understand exactly what was happening. And without family or friends looking out for them, the predators can have a field day.

Thankfully, Washington is in the minority of governments that allow this predatory approach to tax collection, but your loved ones could still be at risk. Those of us with elderly family members and friends need to pay attention to ensure they stay on top of financial matters. Respect their pride, but make sure they get the help they need so they are not taken advantage of. If you have an elderly loved one you want to ensure has the support and protection he or she needs, contact us. We can help.

This article is a service of Gratia P. Schoemakers, Personal Family Lawyer®.  One of the main objectives of our law practice is to keep families out of court and out of conflict. Our lawyers can help you protect those you love using a Family Wealth Planning Session.™ Call our office today to schedule a time for us to sit down and identify the best strategies for you and your family.

Estate Planning with Gifts to Grandchildren

If you are in your “golden years” and are looking for ways to spread your wealth, you should consider the various tools that will allow you to financially protect and benefit your grandchildren. Carefully planning your gifts to your grandchildren is not only a generous act, but can also be a financially wise move in your estate planning and in growing your overall family wealth as well.

So, where do you start with your gifting? You must consider how much you are comfortable with giving. Currently, the Internal Revenue Service permits you to gift up to $14,000 per year, per beneficiary, tax-free. This amount can be doubled to $28,000 if you are married and both spouses make a gift. As you can see, you can gift a substantial amount free of the gift tax, but it is important to confirm that you can afford to do it without it having a negative financial impact on you.

What are the ways to wisely “gift” part of your wealth to your grandchildren? Of course, you could simply hand over a check to them, but that doesn’t provide you with any estate planning benefits nor does it incentivize or encourage your grandchildren to grow that wealth instead of just spend it.  Here are several other options you should consider:

  • Establish and deposit the money into a tax-favored 529 Plan, which is an account created to pay for your grandchild’s educational expenses. You can add money to this fund as you can afford it and there is typically a state tax credit for your donations.
  • Create and fund a “Wealth Creation Trust” for the benefit of your grandchildren. A “Wealth Creation Trust” provides you with substantial flexibility to control, invest, and protect the gifted money for the benefit of your grandchildren as well as incentivizes them to grow the gift instead of squander it.
  • Set-up a custodial bank account for each grandchild to hold the funds — this is basically the same as an outright gift and not advised as this account will be at risk from their creditors, lawsuits, bankruptcies and future divorce.
  • Purchase a life insurance policy with a cash-value component and with your grandchild named as the beneficiary of the death benefit. If you use this strategy, consider using an Irrevocable Life Insurance Trust to own the life insurance so it remains outside of your estate and their estate for successive generations.
  • Explore the opportunities offered by websites such as Upromise and Babymint. These websites allow members to accumulate rebates on items purchased at participating stores and direct those funds into your grandchild’s 529 account or wherever else you choose. Over time, these funds can grow into a substantial amount.

The above list is just a few examples of ways you can provide for your grandchildren’s financial future while also obtaining a tax benefit. Call our office today to schedule a time for us to sit down and talk through a Family Wealth Planning Session, where we can identify the best strategies for you and your family.

6 Tax Questions to Ask Before Year-End

Everyone’s “to-do” lists seem to grow longer at this time of year, but yours is incomplete until you ask your Personal Family Lawyer® to support you to get these six tax questions answered before the end of the year:

Should I defer or accelerate income?  If it looks like you’ll be in a higher tax bracket in 2014, ask if you should pull more income into this year.  Conversely, if you will be in a lower tax bracket next year, ask if you should defer income until January.  In addition, find out if you should accelerate deductions by paying any income or property taxes not due until 2014 this year.

Should I take any gains or losses this year?  If you are currently in a low tax bracket and have made gains on your investments this year, you may want to consider selling some investments to realize lower tax rates on those gains.

Should I do a Roth conversion?  If you have a traditional IRA, you may want to convert all or some of the assets to a Roth IRA, especially if your retirement is years away.  While you will pay taxes on those assets now, your earnings will grow tax-free in a Roth IRA.

Should I make any changes to my FSA or HSA for 2014?  If you have a flexible spending account or health savings account through your employer and anticipate bigger medical expenses in the new year, you may want to increase those funds to allow yourself to use pretax money for out-of-pocket medical costs.

Should I be making charitable contributions?  If you made more money this year, you may want to think about reducing your taxable income with charitable contributions.  Gifting appreciated securities will allow you to avoid the capital gains tax while still deducting the full amount of the donation.

Should I be making gifts to family?  In 2013, you can give up to $14,000 (or $28,000 if you are married and your spouse participates) to as many individuals as you want.  This allows you to assist family members while removing taxable assets from your estate.  It’s important that if you are going to be giving gifts, you call us because we can set it up so those gifts are protected from bankruptcy, divorce or other creditors forever.

If you would like more information about tax-saving strategies, call our office today to schedule a time for us to sit down and talk.

10 Estate Planning Questions to Ask Before Year-End

If you have not revisited your estate plan this year following the changes made to the estate and gift tax laws by the American Taxpayer Relief Act of 2012 passed by Congress on Jan. 1, 2013, ask yourself these 10 questions then schedule a meeting with your Personal Family Lawyer®:

  1. Should your estate plan be changed to reflect any new laws? new assets? changes in your life?
  1. Are your assets being tracked so that if anything happens to you, your family knows exactly how to access everything you own right now?
  1. If you have a family LLC or limited partnership, has it been properly maintained to comply with tax laws?
  1. If you have made gifts to family or friends, have you exceeded your exemption limit for the year?
  1. Are you maximizing opportunities for income tax deductions in 2013?
  1. Are the people you have designated as executor, trustee or beneficiaries still the right ones?
  1. Are you employing the best strategies for year-end charitable gifting?
  1. If you donate cash to a charity from an IRA, are those being made properly?
  1. Is there an opportunity to use a trust to protect assets?
  1. What considerations should you be giving to managing capital gains and timing long-term losses?

If you would like more information about creating or updating your estate plan, call our office today to schedule a time for us to sit down and talk.

10 Tips for Charitable Giving This Holiday Season

According to a recent Forbes article, Americans donated more than $316 billion to charity last year – and most of that came from individuals.  Holidays are a traditional time of giving, and not just because we like to get in those year-end tax deductions!

Forbes provided 10 tips for getting the most out of your charitable giving this year:

  1. Be sure to itemize. The IRS requires that you itemize your charitable deductions each year on your 1040 so be sure to keep careful records.
  1. Get a receipt. If you are giving property, be sure you get a written receipt from the organization and that it lists the items you have donated.  If you are giving cash you need a receipt as well – either from the charity or a cancelled check or credit card receipt that includes the name of the charity.
  1. Choose wisely. Not every charity is recognized by the IRS as an exempt organization.  You can check by name at the IRS Exempt Organizations Select Check website.
  1. Remember payroll deductions. If you give via a payroll deduction, your employer should furnish you with a record of your annual deduction.
  1. Deduct value of incentives. If you receive something in exchange for your donation – even a coffee mug or a t-shirt – you are required to deduct the value of that item from the value of your donation.
  1. Consider giving appreciated assets. You can receive a double benefit if you donate an appreciated asset like stock or real estate.  If you have owned the asset for at least a year, you can deduct the fair market value and avoid paying any capital gains tax.
  1. Understand what you can deduct. If you provide services to a charitable organization, you can deduct things like mileage or supplies, but you cannot deduct your time.
  1. Document gift value. Non-cash items need to be documented in terms of the item’s condition in order to assess a fair market value.  If your donation is worth more than $500, the IRS requires a written appraisal for fair market value.
  1. Be aware of limits. Many people are not aware that there are limits on charitable contributions, which are tied to your adjusted gross income (AGI).  If you give more than 20 percent of your AGI, then you may run up against these limits, which vary according to the gift (cash, non-cash items, appreciated assets).
  1. Give by year-end. You will only receive deductions for those items or cash you give during the calendar year, so be sure you make your donation by Dec. 31.  If you gift via check or credit card, you will receive the deduction as long as they are recorded by Dec. 31 – even if you don’t pay the credit card or the check isn’t cashed until 2014.

If you would like more information about protecting your assets, call our office today to schedule a time for us to sit down and talk.

New Social Security Rules and Services for 2013

There have been a number of new rules and services implemented by the Social Security Administration for 2013 that affect a majority of American workers as well as retirees:

Expiration of the payroll tax cut.  Workers may have already noticed the hit their paychecks took this year due to the expiration of the payroll tax cut, which went from 4.2 percent to 6.2 percent on earnings of less than $113,700 (increased from $110,100 in 2012).

Paper checks to stop.  On March 1, paper Social Security checks will no longer be sent to benefits recipients.  Instead, you will need to choose between two options: direct deposit to a bank or credit union account or a prepaid Direct Express Debit MasterCard.

Online service increased.  Those who qualify to begin receiving Social Security benefits can now apply online instead of visiting a Social Security office.  In addition, you can access your Social Security statement online, which includes your earnings history and expected payments upon retirement.

Office hours decreased.  Social Security offices have started decreasing their hours of operation to reduce costs, and now close at noon on Wednesdays.

Earnings limits increased.  Workers aged 62 to 65 can now earn up to $15,120 before $1 in benefits will be withheld for every $2 of income earned above the limit.  Those who turn 66 in 2014 can earn up to $40,080 before $1 in benefits will be withheld for every $3 of income earned above the limit.  The earnings limit no longer applies to workers over the age of 66.

Payments increased.  Social Security benefits payments increased by 1.7 percent as of Jan. 1, 2013, an average monthly increase of $21.

If you need to know more about effective retirement planning, call our office today to schedule a time for us to sit down and talk.

5 Ways to Ease the Pain of the Payroll Tax Hike

While the fiscal cliff tax deal cut by Congress last month targeted primarily higher wage earners, every American worker is feeling the effects of the payroll tax hike that went into effect on January 1, raising the Social Security payroll tax from 4.2% to 6.2%.

According to the Tax Policy Center, the average employee will feel an annual pinch of about $700 due to this increase.  Families with an annual household income of $100,000 face an income loss of approximately $2,000 a year.

A recent post on CNBC.com provides some tips on what we can all do to help offset this loss in income:

Adjust withholding.  Love getting that big fat IRS refund check every April?  Well, you’re not doing yourself any favors.  By banking with Uncle Sam, you are shorting yourself on funds you can use for your daily expenses.  Be sure you are taking the maximum number of withholding allowances to put that money back in your hands; you can check using the IRS Withholding Calculator.

Shop your insurance.  Financial experts advise consumers to shop around for car and home insurance every year, as rates are constantly changing.  You may be able to qualify for a number of discounts that will lower your rates as well.

Max out 401(k) contributions.  You can reduce your taxable income by contributing the maximum amount to your 401(k).  In 2013, you can contribute up to $17,500; if you’re over the age of 50, you can add another $5,500 in “catch-up contributions” for a total of $23,000.

Mortgage refinancing.  Mortgage rates are at an all-time low and you may be able to significantly reduce your monthly mortgage payment by refinancing now.

Cut monthly fees.  Check all those auto-pay fees and be sure you still need those services you signed up for that take a chunk out of your take-home pay every month.  If your credit score is good, you should be able to qualify for low-rate credit cards as well.

If you’d like to learn more about preserving your assets, call our office today to schedule a time for us to sit down and talk.