Debunking a common divorce tax myth
Interesting Info You Can Read Over a Single Cup of Coffee!
Julie Kern, CPA, CFP®, CDFA®
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In this issue:
- Debunking a common divorce tax myth
- Settlement Assurance Review
- AFI service
Debunking a common divorce tax myth
“Tax season” would seem to end on April 15th. Right? Well, for a lot of people, that answer is “Yes,” but for the affluent divorcing women that you and I both serve, the answer is more like “Not really.”
As a CPA, a CERTIFIED FINANCIAL PLANNER® professional, and a Certified Divorce Financial Analyst® professional, let me help you help your clients better. As I’d hinted in the title of this article, I’d like to debunk a common tax myth that seems especially common amid divorce.
Not just April 15th
First things first. Sure, April 15th is Tax Day, and it’s when tax returns, and payments, are due to the IRS and the state of Arizona (unless an extension is filed). But for divorcing women who may not have a W-2 salary, taxes are still required to be paid ratably throughout the year. I’ll try and stay out of the CPA nerd weeds here, but if you have taxes withheld from your paycheck/you’re a W-2 employee, that’s spread out evenly over the year. So it’s “ratable.” For self-employed, retired people, or those who have taxable income from other sources, they have to pay quarterly estimates to meet the ratable requirement and steer clear of IRS penalties and interest.
(And while they are called “quarterly,” they technically aren’t even quarterly! They’re due in April, June, September, and January—not exactly every three months.)
Many people don’t know that the IRS fully expects taxes to be paid “ratably” . This is why you might see, say, a CEO “stuff their last paycheck” if they’d under-withheld during the year, in order to avoid issues. Any taxes withheld through a W-2 salary are considered to be paid ratably throughout the year. Not so for those without withholding.
My point: Your divorcing-woman client may now be facing the prospect of required quarterly estimate payments, long after April 15th has receded in the rear-view mirror.
The free-ride myth
In many divorce cases, the parties will use IRS Form 4868 to file for an extension; for example, when April 15th rolls around, they can’t agree on how to file (married/jointly vs. separately). So the extension pushes the date from April 15th all the way out to October 15th.
This is awesome! By simply filling out a form, your client can file later, and pay later, too!
Uh, no. Not at all. This is a myth. A misperception. Sure, you can file later, but do you honestly think that the IRS will simply hand out interest-free loans to anyone who will fill out a 4868?
In fact, it gets worse. Not only must you still pay by April 15th (even if you’re filing later), but if you pay later, then the IRS will add both interest and late-payment penalties dating back to April 15th—or possibly even earlier, if you did not have withholding or make estimated tax payments. Which is why I’d covered that topic before this one.
Bottom line: You don’t want to have a client call you up—perhaps even after you think the case is over—because she suddenly got a letter from the IRS. That won’t make your day any nicer than hers.
Avoid the issues in the first place. With my help. Contact me and let’s lubricate your case flow!
Settlement Assurance Review
For every time you’ve been faced with a complex case—such as one with a lump-sum spousal-maintenance payout, or a complicated asset mix with hidden tax implications—and told your client, “You should talk to your tax or financial advisor,” I have a new service for them… and you.
It’s simple. When you and your client are considering a settlement, I can review it from a financial-expert perspective, for a nominal fee, and “bless it” (or not) before you go to court or mediation. The Settlement Assurance Review scrutinizes your client’s divorce settlement terms before finalization, providing:
- Equitability analysis: A detailed evaluation to ensure the proposed settlement terms are fair and well-balanced.
- Tax impact assessment: Identification and explanation of any potential negative tax implications.
- Risk mitigation review: Detection of any hidden financial risks or liabilities that could impact your client’s financial well-being, post-divorce.
During these reviews, I often discover hidden negative tax implications and other undesirable outcomes and risks that would be detrimental to your client. This can significantly reduce your liability exposure, while giving your client added confidence, and making you look even better in the process!
By partnering with us, you can confidently assure your clients that their financial interests are fully protected and their settlements optimized for both fairness and financial clarity.
Contact me and I can help you easily get your clients started with this.
AFI service
Seeing how often improperly-completed AFIs can frustrate attorneys like you, I’ve created an all-new service: I’ll help your divorcing-women clients complete their AFI, within one week of getting the supporting documents (bank and credit-card statements, etc.). And I’ll do it for them for a flat fee of just $495.
So they—and you—will have a good, solid AFI that opposing counsel can’t poke holes in, for a flat fee, in fast time.
Contact me today to get started!
