EP 95: Important Tax Tips BEFORE You Sign the Divorce Decree - Interview with Beth Logan, Enrolled Agent

divorce-and-taxes-beth-logan

"This concept of working together is not only critical for your finances, but it’s critical if you have children.” - Beth Logan, Enrolled Agent

Tax time is coming, so we interview one of the most prominent tax experts in divorce. Her name is Beth Logan, and she is author of Divorce and Taxes: 15 Things You Should Check Before You Sign the Divorce Decree. Taxes are crucially important as you consider divorce because tax missteps can cost you thousands - if not tens of thousands - of dollars.

Beth will explain to us in an easy-to-understand way some essential tax considerations you should be thinking about today.

To learn more about Beth Logan:

Book: Divorce and Taxes: 15 Things You Should Check Before You Sign the Divorce Decree

Blog: http://kozlog.com/index/Blog/Blog.html

Website: http://kozlog.com/index/Welcome.html

This transcript has been edited for clarity.

Shawn: Today I have with me on the show Beth Logan. Beth is an enrolled agent, which she’ll tell us more about in a moment, and also author of Divorce and Taxes: 15 Things You Should Check Before You Sign the Divorce Decree. Beth, welcome to the show.  

Beth: Thank you for having me.

Shawn: Before we get into some of the tax issues which are very relevant at this time of the year, why don’t you tell us a little bit about your background, and also as a basic question too, what does it mean to be an enrolled agent?

Beth: Well my background is very odd. Well, it’s not that odd for an enrolled agent. I actually am an electrical engineer by original education, which turns out to be pretty common with enrolled agents because we’re nerds and we like numbers.

Enrolled agents are federally licensed tax professionals, which means that we go through three part tests; we have a background checks, we have to do continuing education, we have to be re-enrolled every three years. It means that we have credentials, so we’re not just somebody hanging their sign up saying I know taxes. We actually have, not only credentials, but we have to follow something like circular two-thirty, which is a level of ethics and standards required by the US government for people to represent a tax payer before the IRS. So tax attorneys, CPA’s, and enrolled agents are the three groups that can represent a tax payer before the IRS if they have trouble. 

Shawn: Got it. What’s the difference between an enrolled agent and a CPA?

Beth: Well a CPA is a state certified accountant; they have to do auditing. You’ll find that they can do anything from accounting to taxes, to auditing or something called forensic auditing, where you research the books and look for issues. They can do various things and they usually specialize. Enrolled agents specialize in taxes and we don’t spend the time doing the auditing portion that’s needed to become a CPA.

 Shawn: Just so people understand a little bit more about you, how any books have you written?

Beth: Well I’ve now written two books. They’re both on taxes. The first one is The Voters Guide to Tax Policy, which covers the seventeen candidates of last years’ election. But as I tell people, it’s actually a good overview of the different policies that politicians and anybody in congress today could write tax policy. It’s a good overview of those various types of policies which have been bantered about as maybe ways we should go. It’s still actually relevant. I have blog as well and on my recent blog. I just discussed the congressional geo P’s of current plans that they are creating legislation for as we speak.

Shawn: For the listeners, I do encourage you to check out her blog as well. We’ll give the information later, and also in the show notes. This is information that even though taxes seem complicated – and they are –but it’s very good and very well written, and an easy summary to really understand what’s going on in the news versus the reality. That aside, let’s focus on your book, Divorce and Taxes: 15 Things You Should Check Before You Sign the Divorce Decree. At a high level, why are taxes important to consider in divorce?

Beth: Well, any time you’re dealing with finances, which you are in divorce, there is a chance that you can make tax mistakes. I often tell people that most tax mistakes are made from May to December, and the two reasons for that is people aren’t thinking about taxes, and there’s more days. If there’s more days, there’s more chances for mistakes.

On any given day you could do something that ends up hindering your tax situation, and divorce is a big one for that. People think about, “Well I’m going to take a child, and my spouse is going to take a child, so we both can claim head of household and therefore we’re done.” There are many more, which is why I wrote the book. I was finding that people came to me who had just gotten divorced, and they missed some opportunities to save a lot of money.

Shawn: I think that makes sense. I wanted to touch upon just a few high level issues for people. The first thing is your tax filing status. While you’re still married, maybe in the divorce process but still legally married, what are the general options that you have?

Beth: Well in general, when you’re married, you either file married filing separately or married filing jointly. But, there is a little option in there if you have not lived with your spouse for the last six months of the year. When you go to file it’s somewhere in the general February, March, April time frame. You had to have stopped living with your spouse by June 30th  you have six months within that tax year, then if not, return to living with your spouse. If you’ve done that, and you have a child or some other dependent, you may be able to file head of household. It’s a narrow window so you need to make sure that you meet all of the criteria for that. In general, if you’re married, you’re married and you have to file married.

Shawn: And I’ve heard many times that for most people, married filing jointly is the best way while still married to save money on taxes. So why don’t you explain why that is, and then also why might someone consider married filing separately. When would that make sense as well.

Beth: Well the main reason why married filing jointly is better, is because the laws restrict some of your credits and deductions if you married filing separately. The main reason for that is because they are limited by income. For instance, if you are wealthy, if you’re making three hundred thousand dollars a year, you don’t get to take all of the exemptions and deductions. So, what they don’t want somebody to do is file married file married filing separately to hide the spouse’s high income, and try and take those deductions. What they say is if you do married filing separately, you don’t get to take any of those. Because of that, married filing separately is often worse for a couple, because there’s a lot of things they can’t take advantage of. At the same time when you sign that paperwork, you are signing for everything on there regardless of if it’s your information or your spouse’s. So usually if a spouse has a business and the other spouse doesn’t have the ability to see the records and the financial information on that business, we may advise against you filing jointly because you are signing that you believe the numbers on that business are correct. If it’s what we call schedule C business or sole proprietor, or even some other information, if you think your spouse is hiding money and income, then it’s not worth the risk of signing because you become liable, as well as your spouse even if it’s your spouse’s money.

Shawn: Just to take that a little bit further, what kind of penalties or consequences are there, that exists if you are found liable for something that maybe your spouse did?

Beth: It could be as minor as you need to fill out some paperwork and show that you really and truly didn’t know, and would have had no ability to know this information, and it could be as major as fraud which can be considered criminal. So it could be that you owe all the tax money, plus penalties and interest, and could spend time in jail. It just depends on the severity of what I’ll refer to here as an error. If it’s fraudulent, it’s more than an error in the returns. It depends on the situation.

Shawn: Let’s switch gears, let’s say you got divorced last year, just to keep things simple, what are your options from a tax filing status perspective then? 

Beth: Well as I said, when you’re married you file married. That occurs even if you get married at 11PM on new years’ eve, if you are married at the end of the year, you’re married for the year, and the reverse is true. If you get divorced on December 31st, you are divorced for the year, and you file either single or head of household if you have dependence. That’s the only way you would have gotten divorced during the year and filed as anything else is if you get remarried. Then you’re married at the end of the year, just to somebody else. Your option really though is to be single and head of household.

Shawn: Switching gears to the children. How do the tax rules determine who gets to benefit from child related tax benefits? And also kind of what are the big ones?

Beth: Well, most of the determination is actually in the divorce decree. There are actually options and people don’t realize this. People often fight and say they want the child or the other person wants the child because they want to claim head of household which gives you a lower tax rate than claiming single. Then, you also get what we call the exemption or deduction from having that child which is currently four thousand fifty dollars. So that’s four thousand fifty dollars of income you wouldn’t pay tax on. There are actually options that allow one person to claim head of household while the other person gets the exemption. There are different things you can do, and of course if you have two kids, usually each parent will take one, or various things like that. If truly one parents is taking almost all of the care of the child, they generally get the tax benefits unless again there’s something in the divorce decree. As I said, there’s various options you can do, but some of those options have to be written down, and some of those actually need a form sent in with every single tax return.

Shawn: Oh wow. So a lot to think about when it comes to the children. You also have these great chapters. Chapter 10, for people who get the book. It’s entitled All Dollars Are Not Equal. You have this ranking of assets, can you tell us a little bit more about what you were going for there and why that’s important to think about, or why it’s important to think about assets from a tax perspective?

Beth: I actually think for finances, for each individual’s personal finance, this could be the most important chapter because a dollar in cash is worth a dollar. But a dollar in many other assets has tax implications and even selling implications, and that could lower that value. When I rank the assets in the book I say this in general, because it really depends on each individual couple and their financial situation, and their income. In general, if you have a bank account with ten thousand dollars in it, it’s worth ten thousand dollars to you. But if you have, let’s say a home that’s worth three hundred thousand dollars, fist you have to think about what mortgage is on it.

Let’s say you have a hundred thousand dollar mortgage, the home is really not worth three hundred to you. If you sold it, you’d have to pay off the mortgage. But on top of that there could be tax implications. A three hundred thousand dollar house doesn’t, but if you have gains from when you bought that house, to when you sell it, that are more than two hundred and fifty thousand dollars, you’re likely going to have to pay taxes on some of those gains. Now you have a tax implication, plus, if you have to sell the house there’s a cost implication. You have to pay a realtor; you have to pay legal fees. So you need to think these things through. When it comes to investments, same thing. You could have a capital games tax on it. Tax retirement plans seem to be what everybody wants but they don’t necessarily think through what that means. There’s an advantage to taking a retirement plan that’s all that money in there. Normally you’re limited on how much money can go in each year. On the down side, when you take that money out, it’s taxable. So you’re better off with cold hard cash if you need money to live off of or to maybe buy another home because you know you can’t both live in the same home. If you are looking for money you may be better off taking the cash than the retirement. People need to think this through. That goes all the way through to debt. If you just say well, we have this amount of debt and I’ll take these three credit cards and you take the student loans, well student loans, the interest on them is a tax write off and credit card don’t. So you just handed a tax advantage to the other spouse.

You need to actually think through what the post tax implication of all the assets and even debt division is for both spouses, and if you can work together. It is so important on this part that people work together. If they can work together they can get the most overall value out of dividing the assets, and therefore end up dividing more assets between the two of them. This concept of working together is not only critical for your finances, but it’s critical if you have children.

It’s so critical that actually in the state of Massachusetts for the children, they make you take a class in parenting. Basically, take care of the kids, it’s your divorce, leave the kids out of it. But it works the same way for your finances and I’ve shown examples and worked with couples where we can save them several thousand dollars, and then they share it, and it makes them both better off financially. You already have a lot of things to pay for in the divorce, including the attorneys. You might as well try and make things a little better. 

Shawn: I think that’s a great message to end on. Beth what’s the best way for people to contact you?

Beth: Well they can read my blogs, they can get in contact with me through my email, and they can look at my book information all on my website, which is www.kozlog.com.

Shawn: Excellent. I will include a link to that in the show notes. Beth, thank you very much for coming on to the show.

Beth: Well Shawn, thank you for having me. 

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for a full transcript of this episode. You will also find 1-on-1 coaching and be sure to check out the NEW courses Steps to Take Before Divorce and How to Get a Divorce without Losing Everything.

If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.