Whether you are facing a pending divorce or the settlement papers have been filed, it’s time to take control of your life and finances.
In many situations, husbands have paid the bills, filed the annual income taxes and planned for retirement. Suddenly these tasks are yours! What do you do and who can you turn to for advice?
Working with a Certified Public Accountant can help. A CPA can give tax advice as well as connect you with a network of financial professionals who can help with financial planning and retirement and estate planning.
We asked Sue A. Bean – a CPA with more than 25 years of accounting experience and the president-elect of the Piedmont Chapter of the North Carolina Association of CPAs – to answer some common questions. She works with family law attorneys in analyzing financial information for divorce mediation and litigation. Her practice includes individual tax preparation, payroll services and small business consulting. She can be reached at firstname.lastname@example.org.
AZ asks: My husband and I have been working with the same CPA for 20 years, but we are getting divorced. My husband is going to continue using this CPA. Should I also stay with her or is it best to find a new CPA?
Just as it’s not wise for a couple to use the same attorney in divorce proceedings, it’s also best for each party to have his or her own CPA. Sometimes it is hard for the shared CPA to remain objective to both clients. For instance, tax-saving advice for the ex-husband may not benefit the wife.
AZ asks: What’s the best way for me to keep track of monthly expenses and taxable deductions?
Several user-friendly off-the-shelf personal financial software programs are available to help you track your monthly spending and see how it stacks up against your budget. When tax time rolls around, these programs also ensure you will have your records ready to send to your tax preparer.
AZ asks: I was previously covered under my husband’s employer’s health insurance plan, and now I must pay my own premiums. What expenditures are deductible for income tax purposes?
Medical expenses may be tax-deductible using an itemized deduction. Total medical expenses in excess of 7.5 percent of a person’s adjusted gross income can be deducted as part of itemized deductions. Starting in 2013, the 7.5 percent threshold will increase to 10 percent of adjusted gross income.
Some more common deductible medical expenses include costs for:
- Medical services from physicians, surgeons, dentists and other medical professionals
- Medications prescribed by a medical professional
- Medical devices, equipment and supplies prescribed by a medical professional (such as eyeglasses)
- Health and dental insurance
If you are self-employed or you have a medical spending account through your employer, there may be additional deductions available. Be sure to discuss this with your CPA.
AZ asks: What are estimated quarterly tax payments and do I need to pay them?
If you’re an employee, your employer withholds taxes from every paycheck and sends the money to the IRS and probably to your state government as well. In this way, you pay your income taxes as you go.
But if you are self-employed or if you have income other than your salary, such as alimony, you may need to pay quarterly estimated taxes to square your tax bill with Uncle Sam. You may owe estimated taxes if you receive income that isn’t subject to withholding, such as:
- Interest income
- Gains from sales of stock or other assets
- Earnings from a business
Your tax advisor can help determine if you need to make estimated tax payments and, if so, the amount needed to prevent any penalties after April 15.
Speaking of April 15, did you know that you can request a six-month extension for filing your annual tax return? This does not mean that you can postpone paying taxes due at the time of extension. Your tax preparer can help you determine the amount you need to pay when you seek an extension.
AZ asks: How do I calculate my after-tax income from alimony?
After a divorce, your filing status usually changes from “married filing jointly” to “single” or “head of household.” With that change in filing status, there is usually a change in tax rate. You will need to calculate your expected alimony for the year and reduce it by the amount of tax expected to be paid with your new filing status. Your trusted tax advisor can help with determining that rate.
AZ asks: How is child support taxed? Can I claim my child or children as dependents if I receive child support?
Child support is neither taxable income to the recipient nor a tax deduction for the payer.
Legal documents, which are generally controlling, often state which parent can claim a child as a dependent every year or alternate years. If this is not included in the final divorce settlement, the IRS has an established set of guidelines to determine who qualifies as a dependent for income tax purposes. Consult your experienced tax advisor for more information on this.
AZ asks: How do I determine my real/effective tax rate?
Effective tax rate is calculated by the actual income tax paid divided by net taxable income before taxes. It is expressed as a percentage. For example, Helen’s net taxable income is $101,380, and the actual income tax she paid is $17,390. Her effective tax rate is 18 percent.
Sue Bean is not affiliated or endorsed by LPL Financial.