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Modern Family Meets the Great Recession and Divorce

By Susan Carlisle, CPA
From
Valley Lawyer – December 2010
A publication of the
San Fernando Valley Bar Association

An attorney received a frantic call from Steven, a man in his late 40’s. “Please help us. Over the last year the lawyers got the remaining $60,000 equity in our house. There’s nothing left, and we’re not even divorced yet. We’re still living together in the same house. It’s awful. Can we come talk to you right away?” he pleaded.

DIVORCING COUPLES ARE desperately seeking alternatives to making deals “at the courthouse steps.” A trip to the Superior Court in downtown Los Angeles found that a majority of the people in the halls are dressed in clothing from Target or Walmart and few, if any, wear tailored Italian suits. Estimates are that eighty percent or more of the cases are in pro per. The expensive suits are more often sitting in conference rooms in Century City or Encino with private judges at the head of the table.

As the middle class suffers through trauma and disruption, can the family law community justify taking what little remains? In the midst of this jobless recovery, emotional distress is being caused. The impact of the economic downturn will be felt by families for quite some time. The practice of family law will also be transformed, not only as a result of the Great Recession, but as a result of the changing nature of marriage itself.

The normal challenges associated with splitting one household into two in a marital dissolution have been rendered even more daunting. Falling home prices, the slow market in home sales, sizeable credit card debt and home equity loans, along with diminished savings and retirement funds make negotiating a marital settlement agreement even more stressful.

Although there are discussions about giving up on real estate with excessive mortgages, clients think that the market is poised for an upturn in the near future. Only the “ruthless and the reckless” have walked away from their homes (Brett Arends, The Great Mortgage Mystery, Wall Street Journal, Oct. 8, 2010). Most people, especially women, still feel that it is essential to remain in the family residence.

Job loss, or the losses generated by a previously flourishing business, is a real financial stressor that leads to the breakdown of marriages. Men account for about 75% of the decline in employment (U.S. Bureau of Labor Statistics, 2009). The breadwinner has to cope with his declining self- image. Often this triggers depression or exacerbated abusive behavior. Women report their resentment after coming home from work to find their unemployed husband on the couch watching television, or worse, with a bottle of booze. A sudden decline in the marital standard of living is difficult to cope with.

Read more…

Financial Check-Up (Part 4 of 4)

Divorce and taxes.  Not unlike death and taxes, though probably not as often seen together in the same sentence. Which is why Ron and Robert asked CPA James Cagle from Allegent Group to talk about this very topic.

Listen now as Mr. Cagle discusses some common misconceptions about how your tax situation may change after divorce, as well as some recent changes to the laws surrounding divorce and taxes. (Podcast #67)

Missed the first three episodes? Here they are:

Part 1 – Prepare for Tax Season 2011, Filing Your 2010 Taxes

Part 2 – Tax credit vs. Tax deduction

Part 3 – The Proper Care and Feeding of Your CPA

Like what you heard? Subscribe to Ron and Robert on Divorce on iTunes.

Financial Check-Up (Part 3 of 4)

At the turn of the New Year we posted the first two of four interviews with CPA James Cagle from Allegent Group in Woodland Hills.  Now, with tax day literally knocking at the backdoor, we present Part 3 in this excellent series.

What is the proper care and feeding of a CPA?  In other words, how can you be a better client?

For more information about Mr. Cagle and Allegent Group, click HERE.

Like what you heard? Subscribe to Ron and Robert on Divorce on iTunes.

Missed the first two interviews?  Click HERE for Part 1 and click HERE for Part 2.

Financial Check-Up (Part 2 of 4)

Jim Cagle is a CPA with Allegent Group in Woodland Hills.  He has twenty-five years of experience in taxation, business management and directing audits, reviews and compilations with an eye towards measuring and improving the health of business.  Jim has particular expertise in real estate, entertainment, and photo finishing industries.

In honor of the new tax season, Ron and Robert have conducted a four-part interview with Mr. Cagle. Last week they left off talking about the difference between a tax credit and a tax deduction.  In this second interview we’ll find out whether or not childcare expenses are a tax deduction, if there is a difference between childcare expenses and dependent-care expenses, and what kind of expenses qualify as tax credits.

Like what you heard? Subscribe to Ron and Robert on Divorce on iTunes.

Missed last week? Click HERE to listen to it now.

Time to Tattle on Crooked Spouses

Hi everybody,

It’s tax time for us accountants, but that is not what this post is about – well, not exactly.  Actually, it’s to tattle on the law abiding (and crooked) spouses and apprise family law professionals of three income tax changes coming in 2011 that can affect spousal support and estate planning (aka dying expectations).

1.     Depreciation Expense – It’s possible for businesses to buy and deduct up to $125,000 of the cost of business property (furniture, fixtures and equipment).  Yes, there are some phaseout limitations, but it’s worth knowing about this IRS rule.  Why?  Haven’t you ever questioned the cause for that dip in earnings for that business owner spouse?  Most of us look at the obvious answer– unrecorded cash.  But maybe you should look below the top line and peek at the purchase depreciation expense.  Some of it might be added back and included in cash flow, which in turn will increase income available for support to that giving spouse.

2.     Social Security Withholding – Speaking of support, for 2011 only, the legislation reduced the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains at 6.2%).  This translates to hundreds of dollars for each of your clients to use and spend on their support payments.

3.     Estate Taxes – The government reinstated the estate tax, with an estate tax rate of 35% for estates over $5 million (adjusted for inflation after 2011).  Your estate is not tax free to entitled children or heirs as it was in 2010, but it’s still cheaper to die now than it was only a few years ago.

With all this good tax news, I hope you all make lots of money and I wish you all Happy Holidays and a kind and healthy New Year.

Steven B. Garelick, CPA/ABV/CFF, CVA, CFS
MEDIATOR, COLLABORATIVE
email: SBGarelickCPA@gmail.com
tel (818) 601-4707 <<>> (626) 441-1040
fax (818) 884-2641 <<>> (626) 441-1090*

*Post updated to reflect Mr. Garelick’s new contact information.

Roth IRA Conversion Strategies

Today we will hear from Irene Smith, a Certified Divorce Financial Analyst and an affiliate of The Law Collaborative. Irene is a member of the Institute of Divorce Financial Analysts and the Los Angeles Collaborative Family Law Association. She served on the board of the American Women Society of Certified Public Accounts – Los Angeles Chapter, and was the scholarship committee chairperson for the Chapter. She is a frequent speaker on the subjects of financial planning, risk management and financial fitness strategies for women. She holds the designations of Certified Divorce Financial Analyst™, Certified Financial Planner® and Certified Public Accountant. You can visit Irene’s website at www.SmithFinancialManagement.com.

Sincerely,
Ron and Robert

Roth IRA Conversion Strategies

Traditional IRAs offer some great advantages, such as tax-deductible contributions and tax-deferred growth. However, with tax-free growth of earnings, tax-free qualified withdrawals and no required minimum distributions for original account owners, Roth IRAs offer remarkable benefits.

Beginning in 2010, the modified adjusted gross income limit for ROTH IRA conversions no longer applies. To help relieve tax liabilities on IRA conversions, investors who convert in 2010 have the unique opportunity to pay the taxes on conversion with their 2010 income tax return or elect to pay the taxes over the following two years, 2011 and 2012.

If no withdrawal is needed from a retirement account, Roth IRA conversion can transform the account from a retirement vehicle to a wealth transfer tool. Since there are no required minimum distributions (RMD) with Roth IRAs, the account can continue to grow tax free throughout your retirement. Eventually, you can pass it on to your beneficiaries, giving them growth potential and tax-free access to this portion of their inheritance. They will need to take RMDs, but the RMDs will be income tax-free.

Another strategy may apply if you have experienced a loss in the value of your qualified retirement plan or traditional IRA. You could convert the account to a Roth IRA while the markets are down, and pay taxes with non-retirement funds. As the markets recover, the recovered investment loss and any additional investment growth would be tax free, as would any qualified distributions you choose to take in retirement.

Now is the time to talk to your tax and financial advisor to formulate a game plan.

Irene Smith

To contact Irene, email her at Irene.Smith@InvestmentCenters.com

What experts are involved in the collaborative process?

Ron Supancic answers that very question in this short informational video.