Tax Tips for the Newly Single | S2, Ep. 26


Welcome to another episode of the exEXPERTS DIVORCE etc… Podcast where we give you all kinds of information and tips on everything divorce. Why? We’ve lived it, so we get it! We’re T.H. & Jessica. 

T.H.: Welcome everybody to the Divorce etc…podcast. Today, we have Michele Spence with us. She is a partner and CPA at Marcum LLP. The reason we brought her on is because it’s tax time. It’s really kind of always tax time, or something you should be mindful of. We really wanted to put together information for you all that are tax tips for the newly single. Michele is going to answer a bunch of questions that we have for her today. Let’s just get into it, because taxes are very overwhelming, scary, and Michele is none of those things. Welcome to our show Michele.

Michele: Hey, thanks for having me all.

Jessica: Thanks for being here Michele.

Michele: Thank you.

Jessica: I just want to first start, I know we have these questions, but I mean, in general, I think there are a lot of people who first think to themselves, well, I’m going to try to either save money or whatever. I’m going to try to do my taxes myself. Supposedly, there are lots of software programs out there and lots of things that allow people to do that. I understand you’re a CPA, but I mean,

can you just give us some realistic–what would be some of the pros or cons versus working with a professional accountant that can actually do this work for you and it will cost you, versus trying to figure it out yourself?

Michele: Sure. It’s an excellent question, Jessica. I do get a lot of people calling to find out why is it better to use you versus trying to do it myself. So software like TurboTax is perfectly fine if you have a couple of W-2s and some itemized deductions, a very simple, straightforward tax return, not a lot of complexity. You want to use someone like me or a CPA because your situation is such that you may need estimated tax payments, you may have a small business, you make get K-1s, or you may have brokerage statements that you don’t know how to enter or handle. It’s just better sometimes to leave it to the experts. And yes, it does cost money. It costs more money, but in the long run, you’ll save money. That’s really what it’s all about. You want to find a good fit for yourself, if it’s someone local or someone that your family knows, but just don’t go to any old person. I have too many terrible stories from people that go to the wrong person.

Jessica: Right. I also think that for anybody listening out there, I mean, yes, like Michele said, it’s going to cost you if you use an accountant. But the truth is if you are getting divorced or recently divorced, there are so many different things that you guys are going to need to figure out. Michele will talk about some of it, like who’s going to get your child tax deduction, and who’s going to get this, and where everything goes. The truth is this is the kind of thing that you don’t want to mess up. You don’t want to end up owing after the fact. Really, make sure that if you are not in finance yourself, and this is not something that you do on a daily basis yourself, it really is worth the investment of finding someone who can help you work through it.

Alright, so let’s just jump right in. I mean, I think that most people are immediately going to first ask how much do I owe in federal and state taxes?

Michele: Right, so it depends.

Jessica: Always the answer.

Michele: And you know it’s not a bad thing to owe, by the way. But you want to be careful that you don’t owe any penalties or interest if you do owe money. Federal taxes are the biggest generator of revenue for the government. Most people pay into the federal tax system. In addition to that, they may live in a state–like, I live in Connecticut, where we pay state income tax as much as almost 7% in Connecticut. New York’s even worse, don’t even go there. But from the federal perspective, it is something that you have to be aware of if you’re getting a divorce, or you are divorced, because your spouse may have been the one paying the estimated tax payments, or paying the income tax in through their withholding. Now all of a sudden, you don’t have that payment going in. How do you make your taxes? How do you pay it?

Jessica: And so when you’re talking about your spouse may have been paying it through their withholding, does that mean like my spouse worked for this law firm, and his paychecks, the taxes were already being withdrawn and deducted? We didn’t even see any of that, but now all of a sudden, I’m going to be responsible for part of those taxes that just automatically were taken out of their paycheck?

Michele: Exactly. That’s exactly right. As you’re in the process of the divorce process, you want to make sure that you know what’s going to be in your bucket at the end of the day.

For example, if you don’t work, if you’re the spouse that didn’t work, now you’ve got probably some investment income, because typically things are split that way. You’ll get half of the mutual funds, he’ll get half, and you’ll have income generated from those. You might have to pay tax on them. You might have alimony, which we’re going to talk about in a second. If you have these items, you have to consider them when you pay taxes. Your way of paying is going to be through quarterly estimated tax payments, because you don’t have a job. If you did have a job, you could adjust your withholding to cover the investment income.

Jessica: Or if you’re self employed, it is estimated quarterly payments I think as well?

Michele: Yes, that’s right. So yes, if you’re self employed, you’re used to paying those estimates. You would just continue, beginning with the first quarter that the tax is typically due April, June, September and January.

Jessica: So state taxes obviously vary depending on your state. Federal taxes vary based on your income level.

Michele: Correct.

Jessica: Is it possible to do what the brief federal income levels are in terms of what those percentages of taxes are?

Michele: Yeah, I mean, without getting too technical, it all depends on your filing status. If you’re filing single, which means you’re not married (as of the end of the year, you are not married) you can file single. If you have a dependent child living with you, in which you pay more than half the cost of the home, you can file head of household. Single versus head of household have different tax rates and different tax brackets. Single is typically the highest, head of household is better, and married filing jointly is even better. But again, if you’re divorced, you can’t file jointly, alright?

T.H.: You can’t file jointly if you’re not married?

Michele: Correct.

Jessica: But if you are married but getting divorced, but it hasn’t been signed off yet, you can file married but separate?

Michele: You can file separately if you’re not divorced – married filing separately. But that typically results in more taxes due. What we tell people is this. When we’re going through this calculation, we tell them let us do the return based on joint, and then let us split it. Let’s see what the tax differential is. If it’s substantial to the other spouse, we make them pay. We make them give the other spouse some compensation for allowing the joint filing.

Jessica: Right, right, that makes sense. That makes perfect sense. Okay, so really, I was thinking about maybe more like if you make less than 100,000, you’re paying 20% taxes. If you’re making 500,000, you’re paying 30% taxes. There isn’t like a ballpark that–

Michele: There is. Yes. If you make over 520,000, you’re in the 37% bracket, which is the highest tax bracket, just to give you an idea. Most people are between 200,000-400,000, they’re in the 32% bracket.

Jessica: So between 200-400k is 32%?

Michele: Yeah, roughly.

Jessica: Right. Okay.

T.H.: What if you’re not making any money?

Michele: So if you’re not making any money, there are thresholds that require you to file a return if you have certain investment income. You may still have to file, but you may not owe any tax. There is a 0% tax rate. There is. Some people that are very wealthy that only have dividend income or capital gain income may not have any tax due.

Jessica: Yeah. Well, that’s what you keep reading about in the papers, right, about the loophole with all of the big billionaires around. So under 200,000 is less than 32%?

Michele: Yeah, probably 22%, somewhere around there.

T.H.: But the median income right now is what?

Michele: 250.

Jessica: So the average person is paying the middle range, the 32%?

Michele: Yeah, the middle range.

Jessica: Okay.

T.H.: Okay, so then the next question, how do I pay in my taxes?

Michele: If you’re not working in a job where you’re getting a W-2, and they’re withholding taxes, then you have to make those quarterly estimates we talked about. Usually, the accountant will calculate those so that you avoid any underpayment penalties. The IRS wants their money evenly throughout the year. These quarterly payments are due April 15th, June 15th, September 15th, and January 15th. The states follow suit with that. You have to be careful the state you’re in, and if there’s income tax. Like, New Hampshire doesn’t have an income tax, so you wouldn’t have to make state estimates.

T.H.: I actually don’t mind the estimates because it keeps me on track, and I’m not shelling out a big chunk of money at one time. I like having it spread out through the year. Just a tip to everyone, that goes into your budget that we talk about all the time with financial literacy.

Jessica: I’m going to go a step further with that with a tip.

Again, it’s all psychological I think, how people manage and budget their own money, and everybody does things differently. But what I started doing with my quarterly tax payments, even before that, my brother happens to be a wealth advisor, and so he helps manage my accounts. I had him open up–and this is really a good tip I think for people out there, I had him open up what I call to myself, a tax escrow account. Every month, when I get paid, I automatically put what would go towards my taxes into that account. That money basically sits there. I mean, it is short term investments, because obviously, it needs to be paid out quarterly so that every quarter, the money’s already sitting in that account. Because before I started doing that, it’s like you’re living your life, and you’re paying your bills, and you’re doing your things. Then every few months, it’s like, oh, my god, you owe whatever, $20,000. You’re like, wait, hold on a minute. Where’s that money coming from?

T.H.: That’s a great tip.

Jessica: And I see that as a panic button. I really highly recommend setting up some kind of an account somewhere and just have the money in it so you never have to worry about it when it comes time for paying.

Michele: I highly recommend that to my newly divorced women clients to do that. It’s just putting it aside, like you said, out of sight, out of mind. They won’t spend it. We use a certain percentage every month to put aside. That way, they have it. I had a situation where a new client had gotten divorced. Their attorney did not explain back then that alimony was taxable to her. She got over 300,000, and she had nothing left for taxes when we filed in April. She was already behind–

T.H.: Oh, boy.

Jessica: It’s such a scary place to be.

Michele: It’s a bad place to be.

Jessica: Again, just because I’m like that person, I put the money away, but actually, how I have them do it is I have them pull out every week, or every other week, a portion of it, so that by the end of the month, the money’s in there. It’s like I’m not like losing a huge chunk at once in case I actually have some kind of a credit card bill or I have to pay my mortgage or whatever. It comes out of my account in small increments that are less noticeable and less painful.

T.H.: Right, it doesn’t hurt as much.

Jessica: That’s right, and I don’t really notice it. And you know what? Because it’s like when someone gets it deducted out of their paycheck every week throughout the year, I try to set myself up so it’s like that. But I’m really the one pulling it out.

Michele: Right. That’s an excellent tip.

T.H.: That’s good.

Michele: Excellent tip.

T.H.: So let’s get into alimony. Is alimony taxable income? You’ve already answered that, but let’s talk a little bit more about it.

Michele: The rules have changed, T.H., so let me let me explain. Before January 1st 2019, if your divorce agreement stated that the spouse would pay alimony, and it was defined properly as alimony, then the recipient claimed the income and the payor got a tax deduction for it, okay?

But then, January 1st 2019, any divorce decree that was entered into after January 1st 2019 no longer allowed a deduction for alimony nor was it taxable income. Anything before that date stands as is. It’s still taxable, still deductible. But now, for any newer divorces, no deduction and no taxability, so it’s great for the receiving spouse.

Jessica: That’s what I’m thinking. I’m thinking primarily it goes to women, so the women are psyched, and the men are like, I’m getting screwed

T.H.: I remember hearing this, and I called my accountant who was my forensic during my divorce. I’m like, Mike, this is great news. He’s like, no, not for you.

Michele: Because yours was before–

T.H.: We were 2012. I’m sorry.

Michele: I know. But the thing is it is great news to the recipient. I’ve seen firsthand how beneficial it really is. But they typically get less money if that is the case, so keep that in mind. You’re getting a little less, but you’re not paying tax.

Jessica: Right.

T.H.: Right, so just to be clear, I was still getting alimony up until 2021. But because my divorce was granted in 2012, it held true from then. I was like, well, the laws have changed. Why doesn’t it change then from 2019 through the rest of the time I get alimony? But it didn’t. Maybe in the future, but it didn’t yet.

Jessica: Just because I feel words and definitions are constantly changing, we’re all calling it alimony. I think everybody knows what alimony is, but I think that sometimes people that are going through the process now, it’s being called spousal support or spousal maintenance. It’s all the same definition of what it is that we’re talking about.

Michele: Right. But the back in the old days, pre-‘19, it had to be defined as alimony in order for the payments to be deductible and includable in income. For example, one of the requirements was that it had to end upon the death of the recipient. It had to be stated that way in the agreement. If it didn’t say that, it may be called alimony, but it wasn’t taxable or deductible. Just keep that in mind. Also, alimony, again, before 2019, used to be sometimes bundled with child support. That’s called unallocated alimony and child support. Typically, child support is not taxable, but sometimes you would bundle it with the alimony to get a bigger payment. In most cases child support is not taxable. But in some cases when it’s unallocated in your divorce decree, it could be taxable income.

Jessica: Okay, well, that was going to be the next question. What’s the difference between in taxable–

T.H.: Why would anybody bundle it then?

Michele: Because they’re looking for a bigger amount than what you–

T.H.: But you might be paying a bigger amount in terms of taxes?

Michele: Yeah.

Jessica: It must be the way you word it though, because I feel like I bundled it, because I waived alimony.

T.H.: But you waived alimony. Otherwise, you would pay the income of alimony. You’d be paying taxes on that, which you didn’t.

Jessica: Right, but it was going to be a small amount of what I was going to get for alimony. And so I was like, just put it in with the child support, and I’ll waive alimony. I’ll take the full amount as child support.

T.H.: Right, which is fine, but as long as you didn’t use the word alimony in there.

Jessica: Right, I definitely didn’t. Yeah.

Michele: Right, exactly.

Jessica: That was smart.

T.H.: That was smart.

Michele: Yeah, so that the–

T.H.: You got tons of tips, Jess.

Michele: Tons of tips. But again, if your divorce was entered into after 1/1/2019, it will never be taxable income to you–

T.H.: Oh, that’s fabulous.

Michele: –unless they change the law, which they could, because they could do that. It seems like every few years now they keep changing the rules.

Jessica: Okay, when people talk about their filing status, what is that? What’s my filing status?

Michele: Again, it depends on whether you’re married, unmarried, have a dependent child, or don’t have a dependent child. It could either be single, where you’re unmarried and no dependent children. It could be head of household, where you’re–you could be married and file head of household if your spouse doesn’t live in your home for the last six months of the year while you’re going through your divorce. But you have to maintain a home for a dependent child and pay more than half the costs of keeping up the home. That’s where it gets technical. That’s where you need to seek the advice of a CPA to help you determine what your filing status is. Also, you have to find out who can claim the kids. Now, the dependency exemption went away with the Tax Cuts and Jobs Act, but you still have to report on your tax return if you’re claiming a dependent, because of other credits that may be available, like child tax credit, or the child care credit, or the educational credits. It is important to button that down in your divorce agreement as to who is claiming which kid, and when. Because the custodial parent, that is the person who has the children the most, gets a lot of those benefits and doesn’t have to relinquish them to the other spouse unless they sign off on a certain Form 8332.

Jessica: What if you do 50/50 custody, literally 50/50?

Michele: That’s a great question. We do you have cases like that. Well, it depends on if it’s a leap year or not, because if it’s a leap year, you know…

T.H.: Oh my god.

Michele: So if it’s 50/50, typically, the person making the most money will be the one to be able to claim the kid, unfortunately. It depends on who makes the most.

T.H.: Well, the way that we did it is, I have three kids, and at the time I got divorced, well, the time I separated, they were eight, six, and four. I took the two youngest kids as mine, and he took my oldest child as his dependent, because I benefit longer using the two younger kids. “Using”…sorry, in the most loving way. But that’s how we ended up doing it. It was based on their age. I mean, three is not an even number.

Michele: That was so smart. It’s very smart to do.

Jessica: I feel like I should go back and check my agreement. Because I think Michele, to your point, I think we actually worked out who gets to claim the kids. I think it was me.

Michele: Yeah, and because that–

T.H.: You were the primary home also. I was also the primary home.

Jessica: But we were 50/50. My kids were more 50/50 than yours were, but I think that I was like, I want to be named the custodian.

T.H.: It doesn’t matter–oh, yeah, I guess–right, you can still name someone as the primary residence and not be 50/50.

Michele: Mhm, yeah.

T.H.: It could be in the other’s favor. It depends on what town you live in or whatever. You have to be the primary based on their education or other fun stuff…

Michele: The tax laws were different too when you got divorced, Jessica, because there were some people that their incomes were so high that claiming the kid didn’t matter. But now it does matter.

T.H.: You get so many benefits.

Michele: There are benefits, and it doesn’t matter what your income is. Sometimes it does, but it doesn’t typically matter anymore. That’s why with any new divorce agreement, you’ve got to be really careful what you agree to with the children.

Jessica: Right.

T.H.: Okay, so we talked about kids, but let’s talk about filing status one more time. What if you’re living with someone (we can just use me) I’m divorced many years, I’m living with someone, we do have a cohabitation agreement that shows that we own our home 50/50, and then have I just complicated everything? What’s my filing status? Am I still–?

Michele: You’re single.

T.H.: Single? Okay.

Jessica: Also, do you get a mortgage deduction? Because who gets to claim–

T.H.: Only if I take out a mortgage. I haven’t done that.

Michele: Exactly. If weren’t married, and you had a mortgage together, and you paid for that mortgage 50/50, you would be able to deduct half on your return and on half on his return. However, when the tax law changed in 2018 or ‘17, with the Tax Cuts and Jobs Act, they increased the standard deduction for single people, married people, and head of household, and they reduced the state income tax and the real estate tax deduction. A lot of people that thought they could itemize and deduct their mortgage interest and real estate taxes found out that they couldn’t. Sometimes it’s better if one of the people takes the deduction for the mortgage interest and the real estate taxes so they can get over that hurdle of the standard deduction, because it’s the lesser of the two that might take. That’s another thing to keep in mind. You may be thinking you’re getting this great deduction, and you’re not right at all. But that’s not the reason you buy a house or a mortgage. It’s not for the tax deduction.

T.H.: No. Right. Right. Then our last question is, can I deduct the cost of getting divorced?

Michele: No, not anymore. No, no more.

T.H.: And what’s considered a cost of getting divorce? Your lawyer? Or is it extra daycare? Or is it, you know, what is it?

Michele: The legal fees. It’s the expert fees, like if you hired Marcum to value your husband’s medical practice, that’s not deductible. If you hired me to do tax analysis, even tax prep fees for individuals are no longer deductible. There’s nothing you can do other than if you had to pay an attorney to transfer the title of your house. That cost could be added to your basis, but there are really no tax deductions anymore for getting divorced.

Jessica: Okay. So look, I mean, there are obviously a lot more questions that could be asked and a lot more details, but I really feel this is a great basis for anyone who’s starting the process or going through it to get some of the information that you need. If you have other questions, you can reach out to us or to Michele. We’ll have her information available on our site. As T.H. said in the beginning, she’s a partner at Marcum LLP in New Haven, Connecticut. Michele, thank you so much for your time.

Michele: Just one more thing.

Jessica: Yes please, one more thing.

Michele: I just want to close with one thing Jessica. I appreciate you having me on today. I highly recommend that you work with a team such as your CPA, your financial planner, and an attorney. You have to get your estate in order. You have to get wills in order. You have to get your taxes in order and your finances, because you’re going to have to live on a budget. That’s critical. So get your team of trusted people in place, okay? That’s my last tip.

T.H.: Thank you so much Michele.

Jessica: It’s worth having that support around you. So yes, thank you. Feel free to reach out to us if you have any other questions. We can keep the conversation going. You know where to find us. We’ll see you next time. Thank you.

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