Read The Transcript Below:

Steven (00:45):

Hello everyone and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I of course am your host Steven Jarvis, CPA, and joining me on the podcast today we have Amy Irvine, the owner of Rooted Planning Group. She is a financial advisor, she’s an Enrolled Agent, and she was gracious enough to come on the show today to talk about the overlap. Maybe overlap isn’t the right word between taxes and divorce. So Amy, welcome to the show.

Amy (01:16):

Hey, thanks for having me. Two great topics to talk about. Yep.

Steven (01:19):

Two unfortunately necessary topics. I think we would all love a world where neither of them existed, but you probably are better off paying your taxes than there are certainly situations where unfortunately divorce is a good tool for some people to take advantage of.

Amy (01:34):

Right, so a lot of people make mistakes when they’re getting divorced and they don’t map out the taxes associated with it. So I’m excited to share today some of those topics around or some of those issues around that particular topic so people know going into it how to advise their clients. So thank you so much for having me.

Steven (01:51):

Yeah. And before we dive into the meat of that, as I understand it, you probably have more experience than most in dealing with this area. A lot of advisors I work with I know will come across this at some point in their career. Most people listening have probably already come across it a time or two. If you haven’t yet, inevitably it’s going to come up. And so I’m excited to have you on the show to share from your expertise of what people should be on the lookout for when this does come up.

Amy (02:15):

So specifics that you’d like to dig into or should we just sort of roll with the conversation?

Steven (02:20):

Yeah, Amy, just share a little bit about your background on where does maybe interest and expertise in this particular area come from and then yeah, let’s start going down a list of things people need to watch out for, things that can typically go wrong.

Amy (02:32):

So my background, I have a CDFA designation as well as the enrolled agent and the CFP. So I started working with a lot of X Gen clients, I would say probably 10 years ago or so. And unfortunately that is an age range where a lot of divorces really start to peak or show their ugly head, I guess you want to say in some way, shape, or form. And the very first case that I ever had of working with somebody who was divorced, I really felt like a duck out of water. There were so many aspects of dealing with somebody who’s going through a divorce that I needed some additional education on. And so it took us some time to map through all of the different aspects of that case because the person had stuck options and they actually had a very large capital loss carry forward on their tax return.

Steven (03:24):

Oh, interesting.

Amy (03:24):

I knew it was there, but I was like, well, what do you do with this in a divorce situation? Because if one person gets it and the other doesn’t, that could be impactful. How do you share and those stock options when they get exercised, what’s the tax ramification to the person owning it and the person receiving it, and then depending on the state that you get divorced in and for this particular person, is it an equitable state? Is it an equal state? And how do you define equitable and equal? And I don’t know, I just felt like that first case that I ever had was so overwhelming. It took me a lot of time to dig through it and honestly, I felt like I wasn’t prepared to do that work. So I started doing some research on advisors that specialize in working in divorce cases and came across that CDFA designation and so started to explore it at that point in time and thankful that I did because certainly as I work with more and more clients, that’s a particular topic that sometimes people come to me and it’s not that they’re actually getting divorced yet, it’s that they’re exploring divorce. They want to know that over overall consequences if they do pursue a divorce and there’s a big emotional piece involved in that too, but they want to go into that with a decision like, okay, I know how this is going to impact me and not that you should stay in a relationship that you shouldn’t be in, but how does it impact me overall?

(04:48):

And so working with that age group I think is really what has driven me to a certain extent to continue learning, growing and pursuing education around divorce work in and of itself.

Steven (05:01):

That’s really a fascinating dynamic in and of itself. I tell people all the time that really we need to make good life decisions and then figure out the tax impacts and not the other way around. But now I’m just curious because I’ve never been in that situation where someone’s come to me. It sounds like you’re saying that you’ve had clients come and say, we haven’t decided yet if we’re going to get divorced, but we want to know the tax implications. How do you navigate the emotional side of that conversation? I can do the math. That’s not hard, but I don’t know how my initial response would be if one of my clients was like, yep, this is what we’re thinking about. Just let us know the taxes if we do or don’t.

Amy (05:33):

Yeah. And sometimes it’s just how would we split the portfolio too? It’s just how do we split the assets and the income and all of that. But I think that that’s one of the reasons why I pursued the certified financial therapist level one designation was because when people would come to me with statements like that, my first reaction was, oh..

(05:57):

You’re being very adult about this, so let’s kind of sit down and talk through. Now, I don’t like to do collaborative work per se, but there are times there have been a few cases where it’s worked. The two are collaborative in nature. It works, they agree, they understand. They are still communicating with each other in a way that makes it a doable process. But for the most part, usually it’s one person comes to me and talks to me about, and maybe they’re not a client yet, maybe they’re interested in becoming a client just specifically for something around that particular topic. If they’re two clients that are working together with me, then I do have to explain to them that, look, if you’re asking me to give advice on this particular topic, it is hard because my job is to do what’s best for the clients, and you’re asking me to do what’s best for both clients. How do we come to that agreement? How do we make sure that there’s not a conflict of interest on either side and how do we actually walk through this and how do they agree that they’re not going to come back and be upset with me because of the recommendations that we come up with?

(07:03):

So it’s an interesting process when it happens. It doesn’t happen a lot, but it’s certainly interesting, and I will be honest, you asked about the emotional side of it. It definitely is from a standpoint of thinking about the advisor’s emotional health as well, there’s a lot of work that goes into those cases, a lot of emotional work that goes into those cases, not just from their side, but from ours too. And it does require a space. I know for me personally, when I’m doing that kind of work or I know that I’m meeting with a client where I’m doing that kind of work, I always put a little extra time on my calendar for afterwards to recover just a tad bit so I’m not moving into the next meeting with that baggage and that emotion kind of hanging over my head.

Steven (07:50):

Geez, that’s such a great recommendation. That has nothing to do with taxes right there. When you know that you are going to have a client meeting that’s more emotionally charged, leaving yourself an extra gap afterwards, that’s simple brilliance right there, I wouldn’t have thought about that. I really love that recommendation. So Amy, you already mentioned this example. I think you said it was one of the earlier examples that you came across of figuring out what to do with carry forward loss. So speak more to how you actually solve that one then. Let’s start making a list of other things people should be on the lookout for that can potentially go wrong from a tax perspective during divorce.

Amy (08:24):

Well, in that particular situation, the carry forward loss was almost a hundred thousand dollars. So it was quite large. And to try to figure out how to either split the loss so that each person could claim half of it going forward, or were we going to give the higher income earner or the one with the majority of the assets that would have capital gains more of that loss to carry forward. So we had to sit down and look at the portfolios. We had to sit down and look at the taxable portfolios since that’s really where it’s impactful for those capital gains and map out, okay, how are we splitting these assets? Number one, we have to figure that part out first so that we know where the capital gains are going to sit. And this is where we were looking at equitable versus equal because when we actually came down to which assets are going to be split and how are those capital gains going to be assigned and therefore how do we take that capital gain loss carry forward and assign it to each party so that there is equitable distribution?

(09:25):

And that was quite a mathematic equation that we had to work through and a little bit of emotion that was brought into it too because some of those stocks were given or gifted by a family member. So we had to dig into that and the basis was very large in nature and went back years and years and years. So once we got to the math part, then we had to work and agree to the tax part, then we had to work through the emotional part of actually splitting that stuff off. But it was quite a process to come up with. And of course with markets being fluctuating, those figures can change very quickly. So by the time things end up settling, you always have to build in a little bit of variable as to how things are ultimately going to be flushed out once the assets are transferred. So it’s a lot of times we do it in stages so that we can finalize that last piece based on how the transaction actually finalized out. So they did end up splitting that capital loss. It was listed right in the divorce decree, how they were splitting that loss up and who is getting what and then going forward, they were able to take that on their tax returns. It was not 50:50, it was more along the lines of 65:35 in that situation.

Steven (10:36):

Interesting. Yeah, I mean this reinforces what I try to tell people all the time around taxes is that taxes don’t happen in a silo. Every other financial decision, life decisions all have tax impacts. And while I enjoy being a tax specialist, this is why I spend all my time working with advisors because there’s got to be somebody who’s looking at the whole picture. Because if all we’re going to do is the math, inevitably we’re not going to make the most informed decision because this is, life is not just a math equation despite some people’s arguments to the contrary. So that’s the carry forward loss. Amy, what else immediately comes to mind for you of things to be on the lookout for from a tax perspective when clients are going through divorce?

Amy (11:17):

So if you have any RSUs or stock options, we need to take a look at those particular securities. And again, how are each party going to be taxed? Because again, if the bigger income earner is the stock options holder, especially non-qualified stock options or ISOs, then how do we make sure that when those are exercised, it shouldn’t be 50:50 at that point in time because ultimately the higher income earner is going to have to pay higher taxes if they’re the ones that own the stock option. So again, we need to break that out and say, well, what makes this a more equitable distribution when those are exercised, and is there a target price that needs to be set for some of that when we’re discussing the divorce as well, so that the individual that isn’t owning the stock options and maybe isn’t the higher income earner knows what to look for, when to look for, and typically they’re not the ones paying the tax on any of that because the money is being gifted them as part of a settlement in their divorce decree.

(12:18):

That’s one thing that I always want to dig deeply into and make sure that I fully understand. Also, now, it’s very different with regards to alimony and child support, where it used to be a bigger deal to get the greater child support than it was the alimony, right? Because child support wasn’t taxable and alimony was now it’s not so much that way. And so looking at how that breakout is going to happen, and it’s not so much a tax situation anymore as it is thinking about the cashflow side of it, but ultimately making sure that that’s taken into consideration for the equitable distribution or equal distribution in grand total. And then thinking about the overall retirement assets as well, digging into who owns what assets and how those assets will ultimately be distributed and when they will ultimately be distributed. And if one person was a stay at home individual and one person was not, are other reasons why we would want to look at not just the holdings but also the type of holdings. So as an example, let’s say I’m a high income earner and I have a Roth IRA and I’m probably always going to be a high income earner even in retirement, then I’m going to want the Roth IRA Assets, if at all. I can retain those where if the other person isn’t a high income earner, then they could get away with the traditional tax deferred pre-tax retirement assets. So looking at that distribution and saying, well, who’s going to have the greater tax bracket in future years? Who’s likely to have the greater tax bracket in future years? So can I distribute the assets that would be more beneficial based on that? So it’s not just about, okay, there’s retirement accounts, but what kind of retirement accounts? Are there any annuities that would be taken into consideration versus non-qualified annuities where a portion of the money would be taxed and a portion of it wouldn’t. And again, who should receive, how should those be distributed and who would be the better beneficial person to receive that? How would they be taxed and how would that then make it more equitable or more equal if they were to split the assets up? And then another big piece I think that we should really look into is the house, right? The house, the family house, and how that gets split and when it gets split. And often one of the biggest mistakes I see is when one person says, I have to have the house. They have to buy me out. I have to stay in this house. But remember, your exemption for your client is $500,000 when they’re married 250 when they’re not.

(14:59):

So is it really in the best interest to sell or for one person to buy the other person out right now, or is it better to raise the family in the house, retain ownership, sell the house once the kids are older, and then when you sell the house, because there’s two owners potentially, and if you guys can work it out, that’s another whole story to the whole picture. But if you can, then you are able to each take the 250 exemption. So again, those are things that people just think, oh, they just do things based on the fact that they want the house and they don’t think about the tax consequences associated with it. And then finally, I touched base on this just a little bit, but also those brokerage accounts, it’s really important to look at the brokerage accounts, look at the holdings in the brokerage accounts, look at the gains and losses in the brokerage account and think about that distribution, those assets and how they’re distributed as well. Splitting things down the road, 50:50 may not be the best answer. It may be the best answer, but it may not be the best answer because again, if you have somebody who’s in a low tax bracket, their capital gain may be zero or 15%, where if you have somebody in a high tax bracket, they may be up to 20%. So those are kind of some of the high level things that I think about when I’m thinking taxes and divorce, and like you said, nothing’s in a silo because we can build each of those particular issues out. We can look at them all individually, but when the plan all comes together, we do have to look at how they cross-contaminate each other.

Steven (16:32):

Yeah, Amy, I really like how you laid that out. That makes so much sense because you’re trying to think about what’s the end impact to each of the taxpayers because it can be really easy to just say, okay, what’s on the statement? And people do this all the time with their 401K or their IRA, even when they’re not dealing with divorce, they’re thinking, Hey, I have a million dollars in my 401 k, and it’s like, well, you probably only have 700,000 or 600,000. Depend on what state you live in.

(16:58):

Ands where if you’re looking, even if we just take that brokerage account example, this isn’t just let’s find the middle on what’s on the statement and split it in half because we could take a million dollar portfolio and split it one way where half the portfolio is all in a lost position and I have no tax liability and half the portfolio is in a huge gain position and I just got screwed. And so there’s so much wisdom in that of, hey, we don’t want to look at what’s just the number on the paper. We got to look at what the tax implications going forward of these assets are. So much great insight in there. Amy, you referenced a couple of times of making sure what’s included in the divorce decree and a really what might seem like simple example of why that’s so important is working with a client who, when they started working with me, they were already, I think two years into trying to sort this out and the IRS was still fighting them on it a few years ago.

(17:48):

They had gotten divorced, and thankfully specifically in the divorce decree, it stated that the wife was to receive the full, it was like a $15,000 refund on their last year married filing jointly. And so it specifically said that all belongs to the wife. It’s going to go on her return the next year. If I’d been working with ’em at the time and having gone through this, I’d probably do it a little bit different because what they did was they applied the refund forward and then the divorce decree said, Hey, it’s going to be hers. But then the next year, I think really it comes down to the IRS had his name listed first on the married filing joint return, and so they just defaulted to it must be his going forward. Then we got into this multi-year spat with the IRS of trying to figure out exactly where the funds did or didn’t go because the IRS said, oh, well, he got the refund, go ask him for it. Thankfully, initially he started working with us on it, and then unfortunately he passed away. Now it’s not even do they get along, he’s literally not around to help with, this took over two years to finally get her the refund that she was owed all along. But having it spelled out in the divorce decree was really important to getting that resolved.

 Amy (18:59):

Yeah, as part of the finalizing of the estate, right? I, and even just thinking about, again, in the divorce decree, talking about who gets to claim who and how do people file, whether it’s head of household, I mean, those are all things that are really important to have spelled out in the divorce decree too, along the same lines of how does that end up helping either party and sometimes it’s switching years and I mean, I’ve had to work with the IRS and represented people before where the ex-spouse claimed the child when they weren’t supposed to. So then you have to go out and trying to get that mapped out correctly is a nightmare. So having a legal document that says they did something that they weren’t supposed to do does certainly give you some leverage for sure.

Steven (19:43):

Filing status is definitely on my list of things to pay attention to when we’re dealing with divorce. I mean, the IRS doesn’t help us with any of these things. There’s no logic or consistency to the IRS’s rules, and so I don’t even fault people who think, oh, well, I was married for most of the year, so I can probably file married filing jointly, but that’s just not how it works. The IRS only caress about your legal marital status on December 31st. And I was telling you before we jumped on the recording that this just came up within the last year or two with some clients that we have that decided to get divorced. And originally they started filing the divorce paperwork in December and then it kind of got delayed, which then they realized after the fact might be a really good thing because then we pointed out to ’em, oh, you don’t just get a pick married filing jointly or single.

(20:26):

It is really important. Were you married on December 31st? And even if they’re going to be somewhat relatively friendly on it, you’re alluding to also situations where this gets really combative. And I’ve had a situation before where the client every year had to basically race as fast as they could to file their taxes so that they could take their child’s social security number and lock it in the IRS’s system before their ex-spouse could, because in the end, the legal document certainly helped. But in the IRS’s electronic system, as soon as the social security number gets used, then you can’t get this whole mess going on. So they would have to race because it was far from a friendly divorce.

Amy (21:05):

And now just an FYI. If you come across any clients that are like that, the custodial parent or the claiming parent can actually file for a pin now. I mean, that’s one thing that has changed within the system.

Steven (21:17):

On behalf of the child.

Amy (21:19):

Yeah, because had that same situation happen where we’ve had to race and it’s a nightmare to try to fight that system, it’s nightmare. It takes forever. What I’ve learned, fortunately post it’s a lot better, but during covid it was awful. And so yeah, there’s one particular case that I’ve worked on where we finally, because we had three years worth of taxes where we had to keep filing with paper, and it doesn’t get paid until November when you file paper. And there’s a problem with something like that if you’re lucky, it gets paid in November. So that is something that just as an FYI, if you have a situation like that, you can now file for a pin for the child.

Steven (22:01):

That’s great insight. I wasn’t aware of that. I deal with right now, I work with a lot of mid-career professionals and then retirees and pre-retirees. Thankfully, divorce isn’t a frequent part of what I’m dealing with, but that’s definitely going in my notes.

Amy (22:12):

Well, I hope it doesn’t turn to that.

Steven (22:15):

Yeah, me too. I mean, this is one of those things that better to be prepared. I hope you never have to come across it. And then also, at least for me, this is one of those areas where I also like to know that there are people out there who specialize in this because there’s some point where you have to say, you know what? It doesn’t make sense for me to try to become the expert on this for this one situation. Why don’t I go find somebody who does this all the time?

Amy (22:37):

And I think the other thing just as an FYI came to mind is that you’ve got to know what the state of the divorce that’s taking place. So I was mentioning equitable or equal and equitable states, it’s based on the total equity of things and equal states is equal. It is required to split equally all the assets during the marriage. And in some states it’s the earnings on the assets during the marriage too. So you really have to know if you’re working with clients that are going through this, you really have to know what the rules are for each state and not just about the tax side of things, but also the rules for each state. Because even though you know the rules, those rules, you still have some leeway on the tax side, but they are looking for you if it’s a community property state, to split the assets 50:50. So again, you have to play with those numbers and get everybody to agree with the positions, with regards to the taxes and those community states. It can be a bit of a challenge. So just something else to keep in the forefront of your mind. If you’re in one of those nine states or working with somebody in one of those nine states.

Steven (23:43):

It can be really easy to think to yourself, okay, they’re going to get divorced, they’re going to go from married filing jointly to single, and that’s the end of it. And that’s just not the case. There’s going to be, as you’ve been talking about all along, there’s emotional complexities, there’s investment complexities, but there are also tax complexities that you need to be aware of and be proactively addressing rather than waiting until tax time and getting surprised and just making the thing even messier.

Amy (24:10):

And if you can do it before the divorce is final even better because then you can map some of those things out. I mean, again, when you need to get out of the situation, you need to get out of the situation. But if you can take a moment to pause prior to signing the final agreement and look through some of those items that I mentioned, then I guess it can be considered a compromise, which means nobody wins, right?

Steven (24:31):

Yeah. Again, like I said earlier in the episode, make life decisions and then figure out the tax impacts. To your point, if you need to get out, worry about the taxes later as we’re recording this, I’m a week away from my 16th wedding anniversary. I hope to be married for the rest of my life too, but never on the list of reasons to stay married has it been taxes. So that is a different way to think about that.

Amy (24:53):

Congratulations on 16.

Steven (24:55):

Well, thank you. Thank you. It’s been a great run. Amy, as we think through this conversation, every episode of this podcast, we really focus on how to make this valuable, which for us means taking action. So if you think about the advisors listening to this, for the ones who are actively working with clients getting divorced, a lot of this might resonate and they think, okay, I know what I’m going to do, but I mean really this is something that anyone should take note of because like we talked about, this could happen at some point. So what are action items that come to mind for you, for advisors who maybe aren’t going to go get a designation around this but wants to be prepared the next time it comes up?

Amy (25:26):

Yeah, there is a lot of information in your home state websites around divorce and divorce regulations. So I think that’s one thing. Just become familiar with what your filing requirements are. I mean, that’s before we’re even talking about some of the taxes, but that’s what people are going to come to you about. You need to be prepared when they sit down with you to explain to them, your state has a one year waiting period, so just FYI. Those are things that I think are really important upfront, but if they’re looking to further their knowledge and education and their particular state, there are a lot of good pieces of communication out there that I think will help the general rules and regulations. I’m a big Kitces fan myself, so I always say, go out and read some of the materials that are out there on the kitces.com website.

(26:12):

I think there’s tons of good materials. There’s Facebook pages that you can join and get really good information and direction on the things that you might be concerned about. I’m one of those people that says, look, if you don’t know what you’re doing, then reach out to another financial planner and hire them to co-collaborate with you or to give you educational knowledge because you can grow by doing the work together. And I think that’s always a great way to grow your knowledge. If you’re not looking for a particular designation, then those are things that you can do to just get familiar with what’s going on in your state, and then finally, network with the divorce attorneys in the area. They will give you good information. They will share with you some of the things that divorce attorneys don’t want to actually do the split work.

(27:01):

They want to do the legal work, which they’ll tell you, this is what the state law is. When you’re talking about divorce, they’ll talk to you about what the custody rules are. They’ll tell you all of that stuff. They really don’t want to sit down and do that nitty gritty, okay, this asset goes to this person, this income stream goes to that person. You can get to know them and get to know how their practice works and grow from working with them on some things as well and attending continuing education that they need to go to on that particular topic. But those are some of the highlights that I would think of. And if you don’t want the designation, I mean, I’m a little prejudice since I’m a CDFA, but I think that just going and getting the education itself, just reading through the materials, getting the documentation and reading through the materials, NAPFA always has, again, totally prejudice, but NAPFA always has really good sessions at some of the conferences. They have really good education webinars that are available. So I think there’s a ton of information that’s available out there that if you’re looking to grow your knowledge on that, there’s opportunity. It just takes time. That’s the biggest thing.

Steven (28:09):

Well, a hundred percent echo that. It does take time. Tax planning is a time commitment regardless of the topic. But lots of great recommendations in there. I appreciate you taking the time to go through that. I’m also a huge fan of Kitces since you mentioned him. I’ll also just tease that he is going to be a guest coming up here in the coming months on my podcast, so stay tuned for that. Amy, since you mentioned in there collaborating with other financial advisors, as people are listening, they think, geez, Amy knows her stuff. I don’t want to learn that much, but I’ve got a case. How would people contact you or reach out?

Amy (28:39):

Yeah, so the best way to probably reach out to me is through email amy@rootedpg.com. That’s probably the best way. Or send me a text or send me a phone call. Email is just the easiest simply because it’s something that I can get back to when I have a moment. But that’s probably the best way to reach out to me or any of our team members to be honest.

Steven (28:58):

Perfect. Well, I really appreciate that offer and we’ll make sure that your email address ends up in the show notes, amy@rootedpg.com. Well, Amy, thank you so much for coming on the show today, sharing your time and expertise. I’ve really enjoyed the conversation, A lot of valuable insight here.

Amy (29:11):

Thank you for having me and good luck with Kitces. I think you’ve been on his show, if I remember correctly, you’ve actually been a guest on his, seems like I remember you.

Steven (29:19):

I haven’t yet. My brother has twice. That might be what you’re thinking of, Matthew Jarvis over at the Perfect RIA podcast. Always go check that out. But who knows? We will get him on my podcast, so we will see what we can do about swapping episodes.

Amy (29:31):

There you go. Well, good luck with him. He is great to chat with, so I think you’ll really enjoy it. Thanks so much for having me.

Steven (29:37):

Of course. And to everyone listening, thank you for being here. And until next time, good luck out there. And remember to tip your server, not the IRS!