When people divorce, how to deal with money and taxes can be two of the most contentious topics of discussion. One of the advantages of the Collaborative Divorce process is the opportunity to work with a neutral financial professional who helps spouses look at the financial big picture as they work to reach agreement. Couples want to know how to allocate the family finances in a way that can support two households. This requires making some important financial decisions as part of and during the divorce process.
Who Keeps the Family Home?
Who stays in the family home is often a big topic. Each spouse is connected or attached to the home in different ways for different reasons. Each has rationale around why they should be the one to retain possession of the home. There are no cookie-cutter approaches for solving this problem. Some considerations and key factors include:
- Overall Family Finances. How stable are the finances? Can he/she afford to keep the home? Will the home need to be sold for cash flow purposes or for the marital property to be divided fairly?
- Is there a way for both spouses to downsize without compromising lifestyle and lifestyle of the children too much?
- What is the possibility of finding housing in a different geographical area where cost-of-living is less?
- How might household income be increased and expenses be managed differently with two homes?
Divorce and Tax: Importance of the Certified Divorce Financial Analyst
Income tax laws frequently change. For example, the payment of spousal support (alimony) is no longer deductible at the federal level, although it is still deductible in California. Similarly, the spouse who receives spousal support is no longer required to claim the amount as income on their federal tax return, but is required to claim the income on their California return.
Given stated goals, it is important to look at ways to minimize income taxes and optimize cash flow for the family. What is the best way to allocate income and child dependency exemptions to help optimize cash flow?
Certified Divorce Financial Analysts (CDFAs) bring value-added financial planning to the divorce process. As a neutral team member working with spouses together, CDFAs help to explore creative ideas in a safe neutral setting.
Modeling a financial plan to test settlement ideas in advance of decision making may help both spouses to better assess:
- Is this affordable?
- Is this fair?
- Is this what I expected?
- Am I willing to live with it?
CDFAs help to look at different angles of the financial settlement so that, from a tax point of view, the plan strives to be financially efficient. Having a financial professional involved is key to helping families make more informed financial decisions. This results in a more durable divorce agreement.