In this podcast, family lawyer and mediator Vera Bergermann discusses common financial divorce issues in Florida.
Hosted By: Diana Shepherd, Editorial Director, Divorce Magazine
Guest Speaker: Vera Bergermann, Family Lawyer
Divorce Magazine’s Podcasts are available on iTunes. Click here to subscribe.
Read the Transcript of this Podcast Below.
Intro: My name is Diana Shepherd, and I’m the Editorial Director of Divorce Magazine and Family Lawyer Magazine. My guest today is divorce and family law attorney and mediator Vera Bergermann, who will be talking about common financial divorce issues in Florida. The founder of Bergermann Law Firm in Fort Myers, Florida, Vera began practicing law in 1980, and has been practicing family law exclusively since 1996. She holds a Master’s degree in Taxation, a Bachelor’s in Psychology, and she has been a certified family law mediator for more than 20 years.
Diana Shepherd: Most people going through divorce are concerned about getting their “fair share.” What advice would you give them?
I would say, first of all, work with an experienced family law attorney and follow his or her advice, be patient, and trust the process.
How could someone’s income taxes be affected by their divorce?
Once you have a divorce, or while you are going through a divorce, you may be [paying or] receiving spousal support. And spousal support has had a major change in taxation in just the last few years from the major tax bill that was passed in the United States federal government. Previously, most spousal support was taxable to the receiver and deductible by the provider. That is not true anymore, so people think that spousal support is a tax-free process, but it’s really not. The government has seen fit to have it not be deductible by the payor, but it still needs to be reported by the receiver. And that is a major change.
Of course, one’s income taxes can be affected by capital gains. If you receive an asset in the divorce, and then you go and you sell it, it could have a capital gains issue.
And of course, there’s retirement income: if retirement assets have been awarded to you in the divorce, and the plan is in pay status, all of a sudden you have more income – and income is taxable.
You talked about the change in taxation for spousal support – what about child support? Is child support taxable?
No, it is not. It has not been in the past, it is not now, and hopefully will not be in the future.
Are there any tax considerations to be aware of during property division?
It’s important to remember that the property division itself is not a taxable event in a divorce process. Simply moving [property] from one party to another does not create a taxable event. However, when a piece of property is liquidated, that is a taxable event for whoever receives it. For example, a share of stock, [which] was purchased at a certain price. If both of the people were to sell it without a divorce going on, then they would both be equally responsible for the capital gains on that. But since they’re getting divorced, somebody is going to get that share of stock, and the person who gets that share of stock will then be responsible for the capital gains when he or she goes to sell it. In the event that the divorce says “Okay, we’re going to sell this share of stock,” they can decide within the divorce [agreement] that they will equally share not just the proceeds from the sale of stock, but also the capital gains responsibility from it. That can happen as well, so that’s one thing to consider during a property division.
Also, once again, retirement income is actually an asset that is divided like any other piece of property, and if you are receiving some new income from your new asset, you will have tax on it. That is the quick summary on property division tax considerations.
If one spouse wants to keep the marital home, are there any tax or other financial consequences they should be aware of?
Well, on the most basic level, many people have mortgages on their property. And I have yet to see the property – that is, aside from not-for-profit organizations, which marital couple is not – that doesn’t have real estate taxes. So a piece of property like a marital home has real estate taxes and usually mortgage interest, and whoever gets the home generally has to pay the mortgage, [interest,] and the real estate taxes. And those are usable for most people on their taxes as a deduction. So that is a tax consideration.
The other consideration is if you sell the home. If the two people decide to sell the home together, then they will each be responsible for half of the capital gains that they have made on the sale of this home. People are allowed under our tax laws to have a lifetime capital gains exclusion, which is higher for a married couple than it is for a single individual. And that’s something to keep in mind as well. If [they decide] that they want to sell the property, it would be better to sell it together – get it done in a year when they will file jointly – and then move forward because they will have a bigger deduction together if they want to take their one-time lifetime exclusion.
If a couple’s divorce will be final before the end of the year, do they have to sign one last joint tax returns for the year? If not, what are their options – and what are the pros and cons of their options?
No, they do not have to sign one last income tax return that year – there is absolutely no requirement for that at all. In fact, if the divorce is final during the year, they cannot file a joint tax return; that is simply not allowed. However, there are times when that’s beneficial. For example, I recently had a divorce case where the folks decided at mediation that it would make so much more sense for them to file jointly for this tax year, 2019, that they decided to delay the entry of the final judgment to January of 2020 for the sole purpose of being able to enjoy the tax effects of filing together. If they had finished their divorce and gotten the final judgment next month, then that option would not be open to them. So it makes sense to involve one’s financial or tax advisor to look and see whether – based on the projected incomes of the two people for this year – they can do this, whether they can work together and file jointly. It could be that they are at such odds and so emotionally hostile toward one another that working together financially is not at all in in a realm of possibility for them. And that would be a sad thing. That’s for their lawyers to help take control over the situation and make them understand that reason should prevail.
For someone getting divorced in their 30s or 40s, retirement can seem like a long time away. Why is it important to pay attention to the pension during a divorce?
It is important to pay attention to the pension during a divorce because it represents a future income. And who wants to walk away from that?
How are pensions divided on divorce in Florida?
Generally, the pensions are divided equally for a marital portion. And that is an important word to pay attention to: the marital portion. For example, if you have people who got married later in life, and the husband had been working for an entity for many years prior to the marriage, then he’s fully retired when the divorce ensues. One needs to take a look, then, at how many years was that pension accrued. Let’s say it was a total of 352 months, and the marriage during the time that this pension was accrued was only 97 months. You would take 97 as a numerator and 352 as the denominator, and then you would wind up with how much is the marital share, the marital portion of this pension. In this example, it would be 97 divided by 352, you would have a marital share of 27.55%. And that amount is divided by two, and you wind up with approximately 13.75 for a percentage that belongs to the spouse who did not earn the pension. So there is an example of half of a marital portion where part of the pension is non-marital. It’s much simpler if the entire pension is earned during the marriage. If it is, then you pay one-half to each spouse. What gets more interesting is if each spouse has a fully marital pension. Instead of them saying, “Okay, we will enter two separate orders: half of mine will go to you and half of yours will go to me”, you could net [the two pensions] against one another. But they are good reasons not to do that.
Two quick questions: are all pensions divisible on divorce? And if not, what would you do to compensate the other spouse for their share?
No, not all pensions are divisible. There are actually municipal pensions that are not divisible. What we have to do in a situation like that is write it into the agreement that the pension itself is not divisible because of the laws against distributing municipal pensions, and instead, the other person who would normally get that share of the pension will still get the same amount of money, but it will have to be given to the non-earner by the person who earned the pension every month as they receive it.
Generally, we have to figure out taxes in that matter as well. For example, I once had a situation of a person who worked for a municipality in Connecticut, and because that pension was not divisible, we had to figure out what was the tax rate of the person who had worked in Connecticut for the municipality; 25%. So if the other spouse’s share would have been, say, $1,000 a month, then that $1,000 would be reduced by 25% to account for the fact that the entire tax was being borne by the person who worked for the municipality in Connecticut. Therefore, that person would just send a check every month for $1,000 minus 25% in taxes, because if [the pension] could have been divided, then the taxable amount would have been borne by the person who received it when they filed their taxes each year.
If someone needs money today to pay divorce-related expenses, is there any way of gaining access to retirement funds they’ve acquired during property division?
Once you have received funds from a property division, the next question to ask is his pension in pay status. If the pension is in pay status, then, of course, you are having a check coming in every month, and you can use that for divorce-related expenses or anything else that you want. The other thing is maybe you are the person who has the pension, and you can’t afford to pay for your divorce lawyer. So the question then becomes: can I get at my 401k and take a loan from it so I can pay for my lawyer? Again, I would always recommend discussing something like that with your family law attorney before making any kind of a decision like that, because you would not want to run afoul of standing temporary orders of the court that forbid you from taking out extra debt. However, if a small loan – small as compared to the entire amount of the pension or retirement plan 401k whatever it might be – is needed, then that loan would be repaid, every time usually, a paycheck is received, some of that goes back to pay the 401k loan and it would also be considered as part of the equitable distribution process. And that loan would be placed in the column of the person who took it.
Are there any penalties or taxes to be aware of in dividing a pension?
Yes, the number 59½ is an important one in pensions. If you are a person who is 59½ and over and you are receiving some pension funds as part of the divorce, you will not have to pay the penalty of early withdrawal if you are 59½ or more. But if you are not 59½ or more you will have an extra penalty associated with the early withdrawal of retirement funds. So that is the primary consideration. And the other thing to keep in mind is whenever you acquire income, there will generally be a taxable event with that. So if you receive a share of a 401k even if you are over 59½ and do not have to be concerned about the early withdrawal penalty, you will be receiving income that has not been taxed previously – unless, of course, it’s from a Roth IRA – but that will now become new taxable income to you and you would pay taxes on it at your own rate.
Diana Shepherd: My guest for this podcast has been Vera Bergermann, a seasoned family lawyer based in Fort Meyers, Florida. To learn more about how Vera and her experienced team at Bergerman Law Firm can help resolve the financial issues unique to your divorce, request a free initial telephone consultation at www.bergermannlaw.com.