FinPlan Divorce Planner also includes a set of sample training cases for use in learning the software.
To get started on a training case, select Start/Programs/West/FinPlan/DivPlan/IL(name of state)08/Training Cases. Then select the menu item for the support or tax training cases for which you want to print reports. Print out a training case.
How much cash is left if settlement is done with all child support? How about alimony? How about unallocated? Who claims the children? The software calculates federal, state and social security taxes and prepares output reports directly used by clients, attorneys and courts.
- Report with 6 cases side-by-side
- Calculates guideline child support in several states
Prepares comparative reports for assessing if pre-divorce support orders can post taxes (see Creating Summary of Tax Cases Posted) and will also show how to front end load alimony and change property settlement to let parties share in tax savings (see Increase Alimony Case - Using Alimony to Reduce Taxes).
James and Mary Jones are getting divorced. James has a salary and self-employment income from a second job. Mary has only self-employment income. James and Mary have income from interest, dividends and tax exempt interest. There are two children both under the age of 17 who will live with Mary after the divorce. One child (age 10) attends after-school day care while Mary works. Mary is going to retain the marital home after the divorce. They live in TX, which has no state income tax, so you will select Other as state of residence when entering input. Ignore sales tax rates for this case. Given these facts, the Divorce Planner worksheet has been completed (see Training Cases (Support) from Start/Programs/West/FinPlan/DivPlan/IL08 menu).
The objectives are to determine how much after-tax cash will be available, to decide the best way to allocate the child dependency exemptions for tax purposes and to determine the amount of alimony needed to meet Mary’s cash budget requirements.
Step 1.
Enter the information from the Divorce Planner worksheet into a new case. When you begin a new case, an input wizard will direct you through the first few screens. On these initial screens (Basic Facts and Essential Facts) you will deal with facts which must be entered into the software if the tax and support figures are to be correct.
There are normally eight tax facts which must be handled if taxes are to be accurate.
Basic Facts
1. There is a different Social Security tax depending on if the individual is salaried or self-employed. If self-employed, the Social Security tax rate is higher and ½ of the Social Security tax is deducted when calculating federal taxes. There are different input lines for salary and self-employment income.
2. If salaried, an individual can pay different tax rates for Social Security taxes. These include either the full Social Security tax (6.2% on income up to $102,000 and the 1.45% Medicare tax on all income), no Social Security or Medicare taxes (some government workers) or only the Medicare Tax (1.45% teachers and state government workers). This refers to salaried individuals not those who are self-employed.
Essential Facts
3. Filing Status must be determined (Single, Head of Household, Married Joint or Married Separate). Filing status is determined on the last day of the year.
4. The dependency exemption and child tax credit for children under age 17 must be allocated between the parties (do this on lines 2 and 3, Essential Facts depending on age of child). The child tax credit is linked to the dependency exemption and is available only for children under age 17. These lines are not used to determine guideline child support.
5. Child care credit amounts are determined by entries on two lines showing total child care expenses and number of children under age 13 (Max of 2 or more). Only the custodial parent can claim the child care credit.
6. Earned Income Credit is calculated by the software based on number of children under age 19 (Max of 2 or more).
Important. Only the custodial parent is allowed to claim the Earned Income Credit.
7. Alimony is taxable to the recipient and deductible to the payor. Alimony is used to balance the settlement and to get cash flow for each party's needs.
Itemized Deductions
8. There is a menu item for entering itemized deductions. This is important in alimony cases since the after-tax cash of the support receiver will change if itemized deductions are used and the amount of alimony will change depending on how itemized deductions are handled.
In alimony cases, it is important to enter appropriate itemized deductions for the support receiver if you represent the support payor and are trying to get a mix of alimony and child support to get the support receiver to a target level of after-tax cash. If you do the taxes correctly, the amount of alimony will not be more than what is needed to get the support receiver to the level of cash targeted for the settlement.
State and Local Sales Taxes
A new itemized deduction is state and local sales taxes if greater than state income tax. Divorce Planner automatically calculates this based on IRS tables for each state and user entries for the overall sales tax being paid in the community of the divorcing parties.
If you enter accurate information for these eight key tax variables, the cash flow numbers generated by Divorce Planner will be very accurate.
When the Basic Facts and Essential Facts are finished, you may enter additional information by selecting the various input buttons on the Case Facts menu. You move around on the Divorce Planner input screens with the tab, enter or arrow keys or with the mouse (it is easier to go from field to field with the keys instead of the mouse). You will need to use the mouse to exit each screen. Be sure to select the Recalculate button once you have completed the data entry.
Step 2:
Divorce Planner prepares two types of reports
One group shows support and cash flow information, and
The other group presents tax calculations. All of the detail reports are driven by the case facts entered. The reports will change reflecting any subsequent changes made in case facts.
To view the support and cash flow information click on View Support Reports.
|
Support Reports |
Description |
|
After-Tax Cash Year 1 (Annual or Monthly-most states) |
Exhibit 4 in Support Case |
|
After-Tax Cash Highlights (Annual or Monthly) |
More condensed format – same information Exhibit 6 in Support Case |
|
Guideline Child Support Calculation |
In states where software calculates guideline child support |
|
Cash Flow Years 2 & 3 |
After-tax cash for years 2 & 3 |
|
Payor Only |
Cash flow and taxes for payor for all 3 years (presented as Payor) |
|
Receiver Only |
Cash flow and taxes for receiver for all 3 years (presented as Receiver) |
To view the tax calculations click on View Tax Reports.
|
Tax Reports |
Description |
|
Summary of Year 1 Taxes |
Exhibit 7 in Support Case |
|
Federal Tax Calculation |
Exhibit 8 in Support Case |
|
Social Security Tax Calculation |
Exhibit 9 in Support Case |
|
Federal Child Care Credit |
Exhibit 10 in Support Case |
|
Value of Child Dependency Exemption |
Exhibit 11 in Support Case |
|
Value of Under Age 17 Child Tax Credit |
Exhibit 12 in Support Case |
|
Refundable Child Tax Credit |
Exhibit 13 in Support Case |
|
Alternative Minimum Tax |
Not in Support Case |
|
Federal Tax Calculation (3 years) |
Not in Support Case |
|
Federal Tax Calculation - Excluding Alimony |
Not in Support Case - Used to determine tax savings from alimony and for guideline child support in some states. |
The reports are updated each time a fact is changed and the software is recalculated. All of the reports are linked so that the data is always consistent.
Step 3:
Asking “What If” questions. The Split Screen Summary Analysis (see PDF Document Exhibit 2) is the powerhouse of Divorce Planner. It allows you to change a variable in the top portion of the section (input), recalculate and see revised settlement figures below. All of the analysis is done using this one computer screen.
To access the Split Screen Summary Analysis, click on the Support Analysis tab and the Split Screen Summary Analysis button. The top area is where you change the exemptions between parents, add alimony, change filing status, or enter child support if Divorce Planner does not calculate it for your state. After you select Recalculate, the bottom portion of the screen will display new figures to reflect the change you made.
Step 4:
Divorce Planner provides you with a report to post the results of alternative support scenarios developed with the "What If” analysis in Step 3 above. This report is called the Summary of Alimony/Child Support Alternatives (see PDF Exhibit 3). This report is prepared in annual, monthly or weekly numbers. Divorce Planner does not automatically prepare this report. You will need to direct the software to post the results of your “What if” analysis.
To post a scenario of support, you select the Post Analysis button at the bottom of the single split-screen analysis. A dialogue box will appear which allows you to enter a descriptive title for your scenario. It is recommended that you use a number prior to the description (i.e., 1 Guideline Child Spt). Select the green check mark and the screen will display the Summary Report.
Note: If you wish to print detail cash flow and/or tax reports associated with the support scenario just posted, you will need to do it before you change your next set of "What If” assumptions.
Divorce Planner uses the most recent set of case facts for the detail cash and tax reports.
The Alimony Alternatives menu in the Support Analysis menu allows for the calculation of three alimony alternatives in a side-by-side report. (See PDF Exhibit 1 of the training case.) This provides a frame of reference for different alimony amounts.
When you begin to use the software, be sure to make use of the context sensitive help. Context sensitive help is available for each input entry item. For output reports and other tax questions, press F1 to get the HELP, and use the index to locate the topic you wish to find.
Enter the data from the attached Word Doc worksheet through the Case Facts menu. To make this a case which can be used in all states, enter Other State for state tax code. State tax will not be calculated. In this way, the same case can be used in each state because specific state income taxes will change the figures on output reports.
Note: The child dependency exemption and child tax credit should initially be allocated to the custodial parent.
Tip! The Cash Perks line (Other Income, last line) may be changed to reflect your line title. To change the title select the purple text for Cash Perks title and type: "Pers Exp Deduct Sch C." Those words will appear on all relative output reports.
Once you have entered the data, select the Support Analysis menu and Split Screen Summary Analysis if you have a version which automatically calculates child support.
If you have a version with the automatic child support feature (CO, CT, FL, GA, IL, KY, MD, MN, MS, NY, OH, OR, PA, VA, WI), change the setting for Automatic (top right of screen) to "No." This will turn off the automatic child support feature.
Note: Ignore the following instructions for defining how support is based. Your software is preset and can't be changed to redefine the definition of cash available for support.
For this case, it will be assumed that support is based on the "net after tax cash of the payor" (i.e., IL). Divorce Planner allows the user to select how cash available for support is to be defined (in automatic child support states this is already coded in the software) and you can change it in the View Support Reports menu (see Child Support Calculator). Change the setting to net after tax of the payor, if not already set that way. Change the setting for how alimony is handled in the cash flow report to "Yes."
Divorce analysis usually requires looking at alternative support cases. What happens if we use some alimony? What if Jim takes the children as dependency exemptions and under age 17 child tax credit? Divorce Planner is a "What If" software application. Let's see now how to post cases and use the Split Screen to make analysis simple.
Call up the Support Analysis menu and select Split Screen Summary Analysis. You see a split screen like the one shown in PDF Exhibit 2. Take a look at Exhibit 2 and note the line "Net After Cash Available for Support" in which the amount for James is $82,484. This represents all the cash James has after deducting taxes, but before any support. If your version of the software has a different definition of cash available for support, the split screen will calculate the correct amount based on your input in the Child Support Calculator of the View Support Reports menu. The payor's percentage of such cash is also shown and is used in states in which cash available for support is based on the gross cash of both or the net after cash of both. Look at the cash available figure and the payor's share, if applicable, and look up the guideline child support amount from your state’s table and enter that guideline amount as new child support (top right of split screen. The split screen is designed to make you very efficient in looking at support alternatives. Note that the top part of the screen has no values for alimony or child support. This is the same as the input area and so far we have not entered any figures for support.
Example. Let's assume that guideline support is based on the payor's net after tax cash ($82,484) and that in this state the percentage for 2 children is 25%, but the guidelines only apply to the first $6,000 per month ($72,000 per year) of available income. Guideline child support is $18,000 per year and this should be entered as new child support. Now Recalculate and see how the figures at the bottom of the screen now reflect $18,000 of child support and that other numbers have changed.
Note: The cash flow to meet living expenses is the first line at the bottom part of the split screen.
The bottom part of the split screen shows the calculated values based on your data entries. The bottom part of the split screen will show any support amounts projected on an annual basis and will also show monthly figures right next to the annual numbers. In this case, child support is $18,000 per year or $1,500 per month. Key tax variables are shown for both parties at the bottom left of the split screen and include the tax savings from child dependency exemptions and the under age 17 child tax credit. Percentages of bottom line cash flow to meet living expenses and budget comparisons are also shown.
The split screen is designed to give all the information required to assess different support options. In the guideline child support case, Mary has 43% of net cash flow and is under her budget by about $5,266.
All figures will be compared to the budgets if you entered a budget amount. The budget represents the cash needed for living expenses after paying taxes and can be useful if prepared correctly.
The goal is to create Exhibit 3 (annual data) which has two cases posted. To post the guideline child support case as Case 1, select the Support Analysis menu and Post Data to Summary Report or you can post directly from the split screen by selecting the Post Analysis button at bottom of screen. The dialogue box will have Replace current case or Post new case analysis and you should give this a case number and case title. Enter 1 Guideline Child Spt in box and select the green arrow to close out the box. Information has been transferred from the detailed reports to the summary report. Actually, it has been transferred to all three summary reports. The one you are looking at on your screen is a summary report with monthly information. To look at the report which we are creating as Exhibit 3 (Annual), select View Summary Cases Posted Annual from Support Analysis or View Support Reports menus and you will see that Case 1 has also been entered into the report being created as Exhibit 3 (annual).
Case 1 is now posted and a second case can be created. Recall the split screen. Select Support Analysis menu and Split Screen Summary Analysis. Assume you represent Mary and your goal is to get Mary to meet her required budget. You want to hold child support at the same guideline level and add alimony to the settlement to increase Mary's share of cash flow to meet living expenses to her budget level of $54,000.
Move the mouse to new alimony and enter an amount for alimony - you don't know how much, so enter 5,266, which is how much she is under her budget. Recalculate to look at the new results at the bottom of the screen. Mary still has less cash than you want, because she has to pay tax on the alimony. All you're going to do is change alimony amounts until you get Mary to have enough cash to meet her budget. Recalculate each time you enter an alimony amount. $6,156 (annual) as alimony (top of screen) will get her to meet her budget.
Note: In many states the amount of alimony needed to get Mary to her budget is calculated for you and shows at the bottom right part of the split screen as Alimony which Meets Receiver’s Budget - if calculated, simply enter this figure as new alimony and Recalculate.
Let's post this case as Case 2. Select Post Analysis to Summary Report and call this Alimony to = Cash Needs.
This case has been posted as Case 2. You can look at the output report again if you wish. Look at the printed Exhibit 3. In case 2, total cash to meet living expenses increased to $113,218. Cash increases stem from the fact that Jim is deducting alimony at a 28% rate, but Mary is only paying taxes at a 10% rate. Thus, more cash is available for the two parties and the software assists in deciding how to allocate the tax savings of alimony.
There is a graph function available through the single split-screen analysis feature. On the initial single split-screen, select the graph icon at the bottom of the screen to see graphs. Make changes to the variables at the top and when you recalculate, the graphs will be updated. The graphs can be printed.
If you want to customize the titles in the case summary report, enter the title as you post the support case.
To print the summary report, select the print icon at the bottom of the screen when viewing the summary report. You now know how to create alternative support cases. As you use the split screen, don't forget to access the tax tables. Use the HELP index (F1) to access the federal tax tables.
Once you get your data entered, it will only take 10 minutes or less to review support alternatives and you know that the cash flow reflects accurate tax calculations.
To view the output reports, select the View Support Reports or View Tax Reports. Take a look at the Annual After-Tax Cash Report for 2008 (Exhibit 4).
Cash flow to meet living expenses is the bottom line. This is what each party has left after paying all taxes and paying or receiving support.
Note: The budget amounts you entered are used to compare how this settlement stacks up against the required budgets. The share of the bottom line cash which each has under the settlement is shown.
In this case, James has 52.7% of total net cash and Mary has 47.3%. This report also shows taxes saved from the child dependency exemption and the under age 17 child tax credit. As noted, Mary is in a combined federal + state tax bracket of 15% while James is in a 28% bracket.
This report is designed for use in court. There may be times when you want to look at a report which has a detailed tax calculation. Call up View Tax Reports menu and select Federal Tax Calculation. You see the 2008 tax calculation for both parties. Look at Exhibit 8. This is the same information you are looking at on your screen. Look at Exhibits 4, 7 & 8.
Note: If you used the menu to view a report, select the print icon at the bottom of the report.
Exhibit 4 shows taxes as a one-line item and Exhibits 7 & 8 show the detail for the tax figure or how federal taxes are being calculated. Exhibit 7 is a one page summary of 2008 taxes while Exhibit 8 shows the detailed federal income tax calculation including itemized deductions.
Review: Remember what you've done so far. You entered data, calculated the software and posted two cases. Each time you select recalculate, taxes are solved for your case facts. Social Security taxes have been calculated as shown on Exhibit 9 and the Social Security tax shows on Exhibits 4, 7 and 8. Exhibit 10 shows the calculation of the child care credit.
The dependency exemption for the children and the under age 17 child tax credit should initially be allocated to the custodial parent. Transferring the exemptions and child tax credit will be much less frequent than before 1998 (initial under age 17 child tax credit). In this case, there will be a tax increase if James were to take the dependency exemptions (and child tax credit) since his income is too high to fully use the child tax credit.
If the settlement is going to have some alimony, the analysis of who is to take the child dependency exemption and under age 17 child tax credit will generally be made after some alimony has been incorporated into the analysis. This has been done with Case 2.
To evaluate the child dependency exemption and child tax credit, use the split screen - Support Analysis menu and Split Screen Summary Analysis. To determine if switching the children will make tax sense, allocate the two children to both parents and recalculate. The dependency exemption and child tax credit reports may be printed with each parent taking both children to show clients and courts the overall impact, but be sure to change the input back after printing the report. See Exhibits 11, 12 & 13.
In this case, James’ income is too high to fully use the child tax credit, so there are no tax savings from switching the children. Because Mary keeps the dependency exemption and child tax credit, her taxes are lower. This helps James because the alimony needed will be less than if James took the child dependency exemption.
The bottom left portion of the split screen will show the tax savings from the child dependency exemptions (for both over and under age 17) and the child tax credit. Exhibits 11 and 12 are reports showing the value of the dependency exemptions and child tax credit. Both reports show the tax savings from each of these items and show detail of either the dependency exemption or the child tax credit. Exhibit 13 shows the Refundable Child Tax Credit which Mary uses in this case.
These reports are very accurate. The dependency exemption report even evaluates the tax savings when the child dependency exemption span a tax bracket (some of dependency exemption could be used at 28% and some at 25%). The child tax credit report incorporates the additional amount which may be partially refundable under the 2001 tax law changes.
The Child Tax Credit is now refundable (if not allowed due to insufficient taxable income to use credit under regular tax formula) to the extent of 15% of earned income over $12,050 or if there are 3 or more children under age 17. A second page of the child tax credit report will print and Exhibit 13 shows this report. It will be difficult to explain these cases to clients and courts, because the numbers are complicated. There are two methods for a refundable child tax credit. The first is the 15% over $12,050 method and this will usually apply. The key to the 3 children under 17 method is to remember that the full Earned Income Tax Credit is always available. The refundable part of the under age 17 child tax credit is the amount by which Social Security taxes paid exceed the Earned Income Tax Credit up to the amount of the child tax credit which is disallowed by the regular tax formula (this method is almost never used).
In this case, Mary has gross income of almost $40,000 including the alimony. She does not pay any tax and she also gets a refundable child tax credit of $1,082. Many more Head of Household divorced mothers are now going to be getting refundable child tax credits as a result of the tax law changes of 2001 and 2003.
If you have a version which automatically calculates guideline child support in your state, you need to have "Yes" selected in Automatic Child Spt Calculation (Essential Facts, line 5) for the automatic feature to work. You also need a zero in new child support (Essential Facts, line 7) and a zero in new Alimony (for the case example). If you have an amount in new child support, the software will use that amount and override the automatic feature.
For states which do not have the automatic child support feature, the software will calculate a child support amount if you have a zero in new child support (line 5, Essential Facts) and you enter a percentage on line 4 (Child Support %). Call up the split screen. Enter zero in child support and alimony (top of screen). Now enter 10% as Child Spt % and recalculate. The software will calculate child support as 10% of the payor's net after tax cash flow available for support of $82,484. This appears on the lower portion of the split screen. Enter 20% and recalculate. Child support is now $16,497.
When you are using this feature for your own state, the software will use the preset definition of cash available for support for your state and multiply the percent you enter by the appropriate definition of cash available for support. You may change these settings in the View Support Report menu, Child Support Calculator option.
You cannot test this aspect of the software if you have a version which automatically calculates child support. Your version may be using the guideline child support % to calculate guideline child support on amounts over the guideline income maximum or may be using this input for other support related functions.
To save a new case, select the General menu and select Save Case or Save Case As if you want to save the current data under a new case name and retain the original data under the old case name.
When you name a case (up to 50 characters), you may want to add a date after the case name, because dates are not associated with case names in the data base. All cases are saved in the file DPData08.mdb.