140. Divorce and Taxes: Considerations Before You File

0:01

Welcome to WeChat Divorce, hosted by Karen Chalou, Legal Liaison and Catherine Shanahan, CDFA.

Each episode we sit down with divorce professionals and industry experts to provide insights and frank discussions about real people, real situations, and real divorce to help you achieve your best life post divorce.

0:39

Welcome to WeChat Divorce, brought to you by My Divorce Solution and hosted by myself, Karen Shalou, Legal Liaison, and Catherine Shanahan, Divorce Financial Specialist and CDFA.

On these special explainer episodes, we answer the top questions about divorce, giving you confidence and clarity.

0:57

Today, the topic of our conversation is nothing.

No one loves to talk about divorce and taxes considerations before you file.

Everybody wants to know, but nobody wants to talk about it, right, Catherine?

Totally.

1:12

And and then you can’t believe that it’s here again.

I feel like I just did our taxes.

It’s like, oh, no taxes again.

But it is the question that everybody asks.

So in today’s episode, let’s break down some of those considerations.

But it’s sometimes it’s not even considerations.

It’s people’s feelings.

You know, how should I file what they don’t want to file with their spouses anymore?

1:32

So I’m kind of interested in where there’s conversations going to go because I certainly have a few opinions about that.

Yeah.

Well, I think in a pending divorce, it’s front and center.

How are we going to file?

Can I file separately?

1:49

That’s a really big question.

And when you’re in litigation, your attorney’s certainly going to have an opinion about it.

But I typically like to tell people if you know, if you’re early in the year like we are now, or if you’re filing an extension, which you can, you can always file an extension and consider these things.

2:08

But the first step is get the information before you make a decision.

So many people want to make that decision.

How should I file?

But from my perspective, get the information.

You need it for your divorce anyways for income purposes and verification of data.

2:25

So you need it and then make your decision.

And I’m going to turn it over to you because you have all of the factors of how to make those decisions.

Well, I mean, I get what you’re saying.

Yes, I totally agree.

When these tax forms are coming in now, get them if you can.

2:40

But a lot of people can’t because their spouses take them, you know, or they never were in control of this information, excuse me, prior to this.

So it’s kind of scary to ask for those things when you haven’t been part of the tax planning or you’ve just been one of those spouses who just signs the dotted line.

2:57

But the other thing is, you know, first to file is what it is.

So if your spouse goes and files jointly, you don’t have the option.

You can’t change that.

You’ll have to file jointly so.

Unless you don’t sign and.

Even if you don’t sign they’ll they’ll file jointly.

3:14

And if you go to file on your own, you still have to file jointly.

Married filing jointly.

It’s a mess.

Yeah.

Really need to talk to your accountant about that before you agree to file any which way.

But you know, a lot of times you have to consider, you know, do I want to file jointly just so like you said, you can get the information because then before you sign, you should make copies of everything.

3:37

Or is your spouse a little shady and you just want to be done with it and you want to file on your own and pay a little bit more in taxes just to have the relief of what your spouse may or may not be recording?

It’s a it’s a tough decision for a lot of people.

Well, it is, but the whole point is once you have the information, then you can make the determination if you’re going to position yourself to file separately or jointly.

4:00

And no, I get what I get what you’re saying there.

But what if you can’t get your spouse’s information?

You still have to make a decision for yourself.

So right.

Well, if you can’t, then it’s a clear decision, right?

Because you’re not going to file jointly if you don’t have that information like, I think you can definitely stand on that.

4:18

I don’t know, but let’s talk about that because you know you can’t get any information.

So if you agree to file jointly, then you do have control that you could get some information because you’re signing right so.

That is what we’re saying though, right?

4:34

No, you said if you can’t get the information then you have no choice.

Then you just have to move ahead and file on your own.

Right.

But you do have a choice if your spouse wants to file jointly.

Yeah.

And you can’t get the information beforehand.

Go ahead and you can go ahead and do that file jointly because then you will get the information.

4:52

Oh, I see what you’re saying all right.

Meaning you’re entitled to it through the divorce process.

That’s a very good point.

Yeah.

Or not even through the divorce process, even through just filing.

You know, if you’re married and you’re signing a return, you should have to get a copy of it.

5:10

OK.

Yeah, that’s the prior years too.

Yeah.

So there’s a lot of options for sure.

And then sometimes attorneys take the position and, you know, first of all, you need to talk with your accountant to get the data right.

What does filing separately and jointly mean to me from financial aid?

5:27

And that’s not your account.

That’s not your attorney.

Like you said, Karen, you know, if you’re listening, don’t ask your attorney.

Ask your account or get in the you don’t have one.

But if you are going to make a decision that’s not status quo for your family, you do need to let your attorney know.

5:44

Otherwise you could be spending a lot of litigation dollars on a decision that you didn’t intend to be defending.

So it if you can at least let them know, then they can let opposing counsel know what your decision was and everybody moves forward from there.

6:01

Exactly.

And you know, you might not have an option to file jointly if you’re actually divorced.

You know, some people think, OK, well I was married part of the time in 2025.

Let’s say you know, and you get divorced, but it’s in June of 2025 when 8 when December 31st of 2025 comes around, you are legally divorced.

6:22

You cannot file jointly.

You are, you are considered divorced.

It doesn’t matter which month in the year.

It only matters on December 31st what your status is to determine what filing status you could take.

So Catherine, can you help us all understand the statuses single head of household, married filing separately?

6:44

Obviously, we just talked about married filing jointly and really so that people can ask their accountant really good questions.

Right.

So single, you’re single, right?

It’s probably the highest tax status of rate that you’re going to pay.

6:59

Head of household is one that when you have a dependent living with you and you have to check how you know what what amount of time that they’re living with you.

More than six months.

I don’t know.

You’d have to double check them that that’s another question to ask your accountant because people don’t negotiate that in their divorces.

7:18

And so a lot of times the spouse who’s paying child support thinks that they should be claiming have household, but if you have your child, the more majority of the time you should be claiming head of household, It’s a much less tax bracket than claiming single.

7:34

So either you negotiate that in your divorce agreement or you go and, and, and negotiate that after you talk to your accountant to see if it’s beneficial for you or not.

And if you’re giving that away, what’s the benefit to your spouse?

And could that be something that’s negotiable?

And so the how?

7:52

How is head of household different than married filing separately?

It’s all the tax, it’s all the tax deductions, it’s all the what your income is.

It just changes.

Head of households is when you have a dependent marriage filing separately.

It’s just that you’re married and you don’t want to file.

8:09

With your spouse, yeah.

So you’re saying that typically if you can file head of household that would be your first choice, and if you can’t then you file married filing separately if you’re in divorce J?

If you want it well, married filing separately is a higher tax rate than married filing jointly.

8:28

So.

You know, married filing separately, I think comes into play when you don’t trust your spouse’s behavior, right?

So some spouses might withhold information to the IRS or they file late or you don’t really know what they’re doing.

8:45

So you’re just over it, like you don’t want to be a part of that anymore.

So although you might pay more in taxes, you’re Peace of Mind of not being responsible for the way that they file could be worth it to you.

But.

You.

Know it takes us back to the conversation we were having earlier, right?

9:01

It’s the, the flip side to that is if you can’t access data, then it might be a good thing just to agree to file Mary filing jointly because then before you sign, you just copy all the supporting documentation that goes with that tax return.

9:17

And then your accountant has to give you that information because it’s your return as well.

It’s not just your spouse’s.

Your name is on there.

Yeah.

And then another consideration there to your point is if you don’t believe or you are suspicious that you’re spouse isn’t reporting taxes the way they should be reported or the way that you know, it’s required Full disclosure on a tax return.

9:44

I was on a call with an attorney and a client this week, and he was pretty adamant that if the client didn’t feel comfortable that she shouldn’t be signing, especially in this divorce space, because when you sign and you’re suspicious, you’re affirming that you’re no longer suspicious.

10:01

I was like, OK, well that’s interesting.

And then she asked about innocent spouse relief and he said, yeah, that’s available.

You know, if someone would come after that tax return, however, and divorce, everyone’s suspicious.

So it’s a little hard for you to on one hand say I’m divorcing you and I’m suspicious, but I’m also finding this joint tax return.

10:23

So he just gave her a caution and said, let’s talk with your accountant about it.

And then, you know, I just needed to know the information so I could report it on our end so we could give the best financial advice.

But, you know, he was pretty adamant about her being cautious in that space.

10:41

Yeah.

You know, there’s also considerations when you are filing married filing jointly and if you can go to an accountant and have them compare, do a, a comparison between you filing married filing separately versus married filing jointly.

10:58

You can actually see how much your spouse is saving by you allowing the married filing jointly and you can negotiate that saving so that you get it right.

So don’t just overlook taxes when you’re going through your divorce.

11:14

I mean, there’s a lot of considerations around the taxes.

Listen, I’m not ACPA, so there’s things here that I’m probably not even mentioning.

But it really when you’re negotiating, a lot of people just say, oh, fine, oh fine, you can have that.

Because they don’t understand it.

They don’t want to ask more questions.

Their attorneys are not accountants.

11:31

It’s just another step in the process and that’s why I like when we go through that with our clients, give them that space and time to go get that data and like you said a minute ago, so we could do a better financial analysis for them of what their marital state looks like.

Just be a little patient there because there are a lot of considerations, not just the IRS rules, but what’s happening in your negotiation.

11:51

You know, what’s your support number?

What’s your alimony or child support?

What, what are you giving up in assets in your negotiation?

And could this be a place where you get an asset, meaning the tax savings, because it could be thousands and thousands and thousands of dollars for people?

12:08

Yeah, I’ve seen that on the analysis coming back through.

Yeah.

And it is a good negotiation point for sure.

Another issue that comes up is claiming dependence and some people just by default, you know say well I want to claim this year and you claim next year, I claim one and you claim 2.

12:30

But there there’s no thought process behind it.

It just sounds like a tax savings.

So talk about that a little bit.

Well, you know it is the easy route to take.

Let’s just alternate years, right?

And we see that all the time.

But I think the further conversation is who is actually benefiting from that?

12:48

Because if your income doesn’t allow you to benefit from that deduction, why are you taking it?

You know, is it just because, you know, you think you should take it?

But maybe again, this is something you’re negotiating.

You can have your accountant run a comparison if your spouse takes the, the, the dependent deduction or if you do, what’s the savings to the family?

13:09

And if the, if it’s a good savings to the family, why not let your spouse take it?

And that savings can go into an account for your kids college or that savings, you know, you could go towards extracurricular expenses that your kids have.

You know, there’s a lot of things that you can negotiate there.

13:26

You don’t have to be the one that takes the dependence, but you should be the one that knows what the net result of that is for the overall family and and negotiate that.

Yeah, that’s a very great negotiating tool for sure.

Well, nobody wants to give the government more money than they have to, right?

13:44

And listen, there’s so many expenses that come up even in divorce.

You can use it as, OK, you reimburse me for my legal fees by taking that.

You know that that savings you’re getting, I want half of that.

And you put it towards your, I mean, there’s so many things you can put this towards rather than giving it to the government.

But again, it’s another step you have to take because you have to get that comparison from an accountant that knows what they’re doing so that you can negotiate it with confidence and financial clarity.

14:10

Yeah.

Another tax consideration is whether or not spousal support is taxable and in what state it is or it isn’t.

So, you know, that law was changed, I think back in 2019.

14:25

It’s been several years, but I still hear a lot of confusing conversation about it, and it’s really not that confusing.

I know, it amazes me, right?

It’s not confusing.

After 2019, alimony was no longer taxable to the receiving party, nor was it a tax deduction to the paying party.

14:45

Now, if you got divorced prior to 2019, yes, you probably are paying taxes on your alimony and your spouse is probably getting the deduction that their grandfather did, right?

But if if you’re being told that you have to pay taxes on your alimony, I suggest you get a second opinion.

15:01

Yeah, Federal taxes, yes, federal taxes have taxes on that still, but yes, absolutely.

So I’m just shocked if that still comes up.

Another thing I see is roll over taxes, carry forward, carry forward.

15:19

That’s what I’m trying to say.

Yeah, I see that a lot.

And I think when people are considering dividing the tax returns or who’s paying what, so a, it would be a refund from the prior year or a carry forward.

15:37

So how can we help people be aware of that?

Yeah, we’ve had this conversation with a few a tax preparers.

So the carry forward from what I’ve heard mostly is supposed to stay with the asset that it is attached to, right.

So a carry forward loss is because it was calculated off of an asset of some sort.

15:57

So if that asset in divorce is being retained by one spouse, that spouse is supposed to get the carry forward.

It doesn’t always happen like that because sometimes you’re splitting the asset.

Splitting in the carry forward is something that you have to go to your accountant again and see if it’s even possible because we’re getting even conflicting advice about that, or at least I was that.

16:22

Some say it can be, some say it can’t be.

You know, it’s same thing where what attorney says to you, it depends.

So again, I would take that step.

If you have a large carry forward on your tax return, I would go and ask, you know, what asset is this attached to?

16:38

Am I able to carry this forward onto my individual tax return post divorce and then bring that information back.

If you’re working with us, we definitely will put it in your portrait because that information should be given to your attorney so that when you’re negotiating, you’re clear on whether you’re giving that up or not.

16:56

Yeah, good.

The last thing I want to cover is when people are going through divorce, especially if it’s a new, newer divorce, one of the options attorneys will give them is to take money from their 401K unknowingly to many, many people, there’s tax consequences that are not realized then until the next year, right?

17:21

They’re kind of shocked.

So I would love if we could cover that as kind of our last point today because sometimes that’s just a a terrible financial decision.

Oh my gosh, most of the times it is.

Now listen, I agree.

17:36

There are times that that’s all you have and you have to do that, but you have to negotiate who’s paying those taxes.

So even if it’s in, well, if it’s in your name when you’re post divorce, your tax return is filed, you’re going to get that tax reporting.

So you will be responsible for it.

17:52

And if you don’t negotiate it, then you’re paying it all where your spouse should be paying half of it probably.

But you know, they, they get the advice to go to their 401K if they could take a loan or their IRA or anything that’s liquid to them because that’s where most money is, right?

18:10

Most people have their money tied up in their house or in their retirement.

So for an attorney to get paid and they see an account within the retirement account, you know, with hundreds of thousands of dollars, they say go ahead and get it from there because they want to get paid.

You know, so I would just be weary of that because you are paying taxes.

18:28

And if you’re not 59 1/2, you’re paying an extra 10% tax on that.

And it’s the same thing when you’re negotiating like a buyout or an asset.

You know, instead of alimony, we’ll give you more of this retirement account.

OK.

Well, alimony is supposed to help you with your cash flow currently.

So if you need to dip into that retirement money that they’re giving you or putting on your side of the the chart, you know you have to consider truing up that amount to adding maybe 20%.

18:54

You get an additional 20% because you aren’t going to pay taxes on it to meet your daily living expenses.

Even if it is a viable option to get attorneys fees paid to your point, you have to know the financial impact all day long.

Yes, yeah, you never want to be blindsided by your do your tax return the following year and you now owe, you know, 20% of what you took out.

19:19

Yeah.

And it it, it impacts your settlement negotiations too, but that’s a topic for another day for.

Yeah.

And also when you do that liquidation, they’re gonna, they’re gonna ask you should we withhold taxes?

So you have to liquidate 20% more than you’re thinking because they’re gonna hold it back from you to make sure the government’s paid first.

19:38

It’s.

A lot.

It’s a lot to consider and listen, nobody likes taxes and it comes so quickly and you’re negotiating so many things in your divorce.

And when it comes to taxes, everyone feels like they just don’t have the information or they feel like they don’t have the knowledge.

19:53

So, you know, we’re all about taking that time and space and putting a little bit of energy into working with an accountant to just get these questions answered.

And then you can go ahead and choose whatever you think the best thing is to do for you and your family, but get the information.

20:09

Just don’t go into it saying OK.

Doesn’t matter, you can have what you want.

Absolutely.

As we always say, preparation is key for sure.

All right.

Well, this concludes our discussion.

Divorces and taxes considerations before you file.

20:26

Thank you to all of our listeners for tuning in.

We invite your questions or feedback always.

We want this discussion to be very financially beneficial to you. e-mail us at hello at ck11.net with your questions or comments and stay tuned for future episodes.

20:45

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Please consult with professionals in their relevant fields for personalized guidance.

21:03

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21:25

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