Monday, March 08, 2010

Divorced in 09? Here are Some Helpful Tax Hints

Many times we are very confused how to file our taxes for the year in which we were divorced. It can be complicated and here are a few tips that may help you.

I received a question from a woman who had divorced in 2009, and she was concerned about having to file taxes with her ex-spouse for her 2009 tax return. Fortunately, the law provides a solution: it simply says that exes cannot file together.

There is one important date to always bear in mind and that is Dec. 31. If you are married as of that date you may file as 'married filing jointly,' 'married filing separately,' and under some circumstances as head of household, for that tax year.

If you were divorced as of Dec. 31 then you can file as single or head of household for that tax year.

Head of household requires that you have a qualifying individual living with you for at least 183 days of that tax year. It is important to note that head of household status is not conferred upon you by the divorce decree or judicial order but by the requirements as outlined in the Internal Revenue Code.

You may have a dependency exemption for any children and those can be allocated in the divorce decree. Often the divorce decree will call for each parent to claim the deduction on alternating years. If you are not the custodial parent then you will be required to file form 8322 which is titled Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. (Thank goodness for form numbers.)

You may claim a child provided they are under 19, or 24 if a full time student, for at least five months of the year and they do not provide more than half their own support. If the child is permanently and totally disabled there is no age limit.

The child must be younger than the taxpayer and spouse in the event of a 'married filing jointly' return. Keep that in mind should you decide to marry someone much younger than yourself!

Money that you receive as child support is not a taxable event. The recipient does not declare it and the payer cannot claim it as a deduction. Alimony on the other hand is taxable to the recipient and is a tax deduction for the payer. The amount of alimony received goes on line 11 of form 1040 and the amount of alimony paid goes on line 31. Alimony is a component of adjusted gross income, a number that is used to determine many entitlements.

Beware of what I call 'hidden alimony.' One example may be the premiums the ex-spouse paid on court ordered life insurance for your benefit. Also certain expenses paid for housing that were not in his name, such as property taxes on a house that was not in his name or was in both names with rights of survivorship.

One question that I am often asked is, "To what extent can I deduct legal fees and other costs incurred with my divorce?" The answer is that legal fees for the divorce itself are not deductible however legal fees post divorce may be if they are paid for services rendered in an attempt to recoup taxable income. In other words if you had to go to court because your ex did not pay alimony for three months, those legal fees may be deducted on schedule A, miscellaneous itemized deductions subject to the 2% floor of AGI. If you retain a financial planner to do projections for you on a possible settlement, then that money may be a deduction as well, again subject to the 2% floor on AGI. For those who wonder what that means here is a clear example. Your adjusted gross income is $100,000 and therefore the first $2,000 of deductible miscellaneous expenses is for your own account. If you paid a financial planner $2,000 and a lawyer qualifying expenses of $2,000 then only $2,000 would be deductible although each expense has to be claimed.

The non custodial parent may claim a child tax credit in the years that they are entitled to claim the dependency exemption provided all other conditions are met.

If you changed your name after the divorce, you should notify the Social Security Administration and file a form SS-5. This will prevent possible delays since the name on the tax return will not match the Social Security number of the flier. It will definitely create a delay in e-filing a return.

If you are not used to filing your own taxes you may wish to use a professional and plan to spend some additional time going over all the facts.

© 2010

Thursday, January 21, 2010

Financial Designations are Not Really as Simple As ABC!

There are way too many designations that financial advisers use and none of them are statutory.

A few months ago during a discussion of financial credentials it was pointed out that the public is somewhat confused by what all the acronyms mean. That was music to my ears because I cannot think of one other industry that has created so many initials to place after someone’s name on their business card. For other professions, it was simply Marcus Welby, MD, and everyone understood that he was a doctor. If Perry Mason had a business card it would have simply said Attorney at Law or perhaps Perry Mason J.D.

I was challenged to put together a list that might be educational but does not reflect strongly my own opinion that there are way too many organizations selling initials.

In the world of investment advice and financial planning there are certain registrations that are, by law, required to be held. No designations are required.

The first is Registered Investment Advisor, which means that the person has registered with their state or with the SEC as an investment adviser. The body with which they register is determined by the amount of assets that they are managing. Currently if you have less than $25 million you register with the states. If you have more you register with the Securities and Exchanges Commission. Registered Investment Advisors are governed by the Investment Advisers Act of 1940 and it provides for the disclosure and the fiduciary relationship that everyone is all abuzz about. The person or firm provides investment advice for a fee. A Registered Investment Advisor cannot use the abbreviations RIA on their cards or letterhead.

Along a similar path comes the Registered Representative or Stockbroker. They are authorized to sell securities for a commission and must have either a limited Series 6, which allows for the sale of mutual funds, or the more encompassing Series 7, which allows for the sale of funds and general securities. They are granted and regulated through FINRA. Registered Representatives are not allowed to refer to themselves as financial planners.

Those registrations are at the top of the food chain and allow for the provision of advice for a fee, management of securities for a fee or the sale of securities for a commission.

The next set of initials that the public seems to be enamored with is the CPA or Certified Public Account. This is a licensed profession regulated by each state. While many people think a CPA is an expert in taxation, the truth is that the CPA license is required in order to attest to the accuracy of financial statements. No small or insignificant task considering the ENRONs, World Coms and Madoffs that we have seen this past decade.

Many CPAs also have added the initials PFS after their CPA designation. Personal Financial Specialist means they have completed additional studies dealing with personal finance as opposed to corporate issues. However, the addition of those three letters does not afford them any legal right to call themselves financial planners.

Next we have the CFP® designation which is the Certified Financial Planner™ mark owned and franchised by the Certified Financial Planner Board of Standards. They do require that current applicants have completed an educational track of five approved courses, have a college degree, pass a comprehensive examination and submit to both a background check and adhere to a code of ethics. However, the holder of a CFP does not have any legal right to call themselves a financial planner.

In fact depending who they work for a CFP may use the designation but may not be allowed to refer to themselves as a financial planner. That one statement speaks volumes about the sad state of the financial industry.

Along the lines of the CFP mark is the Chartered Financial Consultant® designation, which is awarded by the American College in Bryn Mawr, PA. The college is nearly 100 years old and has curriculum for numerous designations. The requirements of the ChFC are completion of an educational track and passing of a comprehensive examination. Holders of the ChFC must also undertake continuing education requirements biennially.

Read more about the CFP mark and ChFC here.

The CFA Institute issues a designation called the Chartered Financial Analyst or CFA. The requirements to obtain that involve passing three difficult exams, each exam given annually. The holders receive an excellent knowledge of the investment arena and many of the products used. While the CFA is a wonderful designation I truly question its usefulness to the consumer who is seeking financial planning advice and not portfolio management. The CFA curriculum devotes very little time to personal finance.

You will find that there are numerous other designations out there all created to fill a niche. The vast majority are ones that require little study and are often granted over a weekend. I question their value and in fact I have had one or two of them in the past and allowed them to lapse. It seems that as a subject becomes “hot” a designation is created and the real beneficiaries are the creating organizations.

I have provided the registrations required to deal in securities, either for a fee or commission as well as the three most common designations that people associate with financial planning. None of them are required by law to provide financial planning advice.

The public needs to be wary of the designation craze and seek the individuals that are legally empowered to provide either advice or sale.