This might seem like a silly question. “Are you over-taxing your clients?” You’re not a tax collector. You’re not the IRS. You’re a family-law attorney.

And no, I’m not talking about “taxing” in the figurative sense, like “putting a burden on them.” I’m talking about good old-fashioned death-and-taxes taxes.

Of course, I’ll clarify this. I’m, after all, a CPA (not to mention a CERTIFIED FINANCIAL PLANNER™ professional and a Certified Divorce Financial Analyst® professional).

As you know, parties come to divorce with their wants. “I want the house.” Or “I don’t want to share my 401(k).” (To which I add, snarkily, “…even though it’s typically community property”!)

Your job is to get to a settlement. But the way you get there is via a minefield of tax issues and implications that most attorneys, unfortunately, overlook. Which doesn’t help their clients too much—nor their reputations, when these things come back to bite the aforesaid clients, oh, let’s say, on Tax Day.

Have I got your attention now?

Weeds, weeds, and more weeds

The single biggest issue which attorneys overlook—from my perspective, as a professional who specializes in helping women with the financial side of divorce—is the different taxation on different types of assets.

Let me repeat that:

Different taxation. On different types of assets.

You can guess at the subtext here: Attorneys all-too-often treat different assets as if they are fungible, when it comes to dividing up the community property. And while that might look feasible in a proposed settlement, it’s anything but in the eyes of Uncle Sam. Or the Grand Canyon State, for that matter.

Case in point: Retirement accounts. Upon withdrawal, these are taxed as ordinary income… except in the case of Roth IRAs or Roth 401(k)’s. Those aren’t taxed upon withdrawal.

And “ordinary income” tax rates will vary, depending upon your tax bracket at the time of withdrawal. Not to mention what the tax rates and laws might be at that time. So, the Roth’s vs. the non-Roth’s are apples and oranges.

Here’s what I’ll typically hear from an attorney: “There are two IRAs in the husband’s name. He’ll keep one, and we’ll split the other, so it works out 50/50.”

Not so fast. If the husband gets the Roth, he gets all the tax benefit, and the wife doesn’t. That’s not “50/50.”

Capital offense

And don’t even start me on capital-gains taxes. There’s short- and long-term taxing, depending upon whether the securities were held for at least a year-and-a-day (long-term), or less (short-term).

Hint: The long-term tax rate is more favorable than the short-term one. And then there’s the relatively recent (c. 2013) “net investment income tax” which was added specifically to punish affluent clients like yours. It’s on top of the capital-gains tax, and can be triggered by single earners making over $200k—or couples making $250k. Yep: Just $125k/year per spouse, and they get hit by this.

(Contrast this to no capital-gains tax for people earning less than $40k per year, and you’ll see just how progressive the regimen is.)

Anyway, here’s my point: To do right by your clients, you’ve got to keep your apples with your apples, and your oranges with your oranges. You’ve got to be forward-looking on their behalf: Equity in a house, for example, can’t be used to purchase groceries. How do you structure the best financial settlement for your client?

Simple: You call me.

Let’s talk!

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