May 29, 2020

Episode 19: Taxes, Taxes, Taxes with Kelly Galardi, CPA

On this episode, we are honored to welcome Kelly Galardi. Kelly is a CPA that provides tax advisory services for small businesses and individuals. She specializes in working with clients who are separating or divorcing.

Let’s chat about… yes, TAXES.

There is a lot to deal with during a divorce. Add to the list more complicated paperwork during tax filing time…ugh!

  • Do I file separately or jointly while I am going through a divorce?
  • Benefits to filing as head of household.
  • Electronically Filing joint tax returns, without both spouses having signed off!? OH MY! What you will need is a 8879 form annually.
  • Where do I go to find the status of my stimulus payment? Imagine a couple who filed taxes jointly in 2018, and their refund was direct deposited into their joint bank account. But they divorced in 2019, and they no longer share the bank account…

We hope you enjoy listening to this month’s episode of We Chat Divorce.

If you have questions for us or a topic you’d like us to cover, contact us at hello@mydivorcesolution.com or visit MyDivorceSolution.com

Resources:

IRS Stimulus Check Tracker
www.irs.gov/coronavirus/get-my-payment

Karen Chellew:

Hello and welcome to We Chat Divorce. Hello, I'm Karen Chellew. Legal liaison, here with Catherine Shanahan, a CDFA. We're co founders of My Divorce Solution, a company whose mission is to change the way people get divorced by providing a different approach, financial clarity, and an online course to help couples develop a transparent plan that will optimize the outcome of their divorce. Each podcast, we sit down with professionals who provide insight and frank discussion on real people, real situations, and real divorce.

Karen Chellew:

Today, we're honored to welcome Kelly Galardi. Kelly is a CPA that provides tax advisory services for small businesses and individuals. She specializes in working with clients who are separating or divorcing. Welcome Kelly.

Kelly Galardi:

Hello ladies. I'm so happy to be here with you.

Catherine Shanahan:

Nice to see you.

Kelly Galardi:

Nice to see you as well.

Karen Chellew:

So we're going to start out today talking about tax issues and how they specifically affect people going through divorce. So I feel like first and foremost, the top issue that comes up is do I file separately or jointly while I'm going through a divorce? And I guess afterwards, you have to file separately, but during the divorce process, the common question comes up, separately or jointly? So how does a couple or separate individuals make that determination?

Kelly Galardi:

Absolutely. That is a very, very common question. And I just want to confirm that you guys can hear me well, is that correct?

Catherine Shanahan:

I can.

Karen Chellew:

Yes. You sound great.

Kelly Galardi:

Okay, good. I'm glad. So basically, couples are always able to file separately should they choose to do that. There's a filing status, married filing separate and married filing jointly. Most often, I think I have clients that are filing jointly when they are married, because there are tax advantages, generally speaking to file that way. The standard deduction is high. The marginal tax rates are preferable. So that's why more often than not clients choose to do that.

Kelly Galardi:

However, clients in very healthy marriages can often file separately as well for other reasons. Sometimes one member of a married couple is self-employed and for whatever reason, the other spouse chooses to file separately. Doesn't want to commingle with any of their stuff with their business, and that's absolutely fine.

Karen Chellew:

[crosstalk 00:03:20] tax advantages for that? If one spouse or the other runs a business, or is that a topic for another day?

Kelly Galardi:

That's a topic for another day, certainly. But yes, there could be. There could be advantages sometimes... A lot of the tax law currently is structured around something called adjusted gross income. So when you file separately, your adjusted gross income is different. So I'd say it's rare that I find a situation where it's more tax efficient for a married couple to file separately, but I have seen situations where they do choose to do so, and it does make sense for them tax wise. But that's certainly not the norm.

Kelly Galardi:

But [inaudible 00:04:17] really as it relates to that, something called adjusted gross income, and the fact that when you're together, it's different. You have two individuals contributing to that number. Whereas when you separate that, sometimes there's the ability to take other things into consideration because the adjusted gross income is lower, but sometimes there's not. So that's definitely for a different day.

Kelly Galardi:

However, for couples that are separating, considering separating at the beginning stages of the divorce process, it's always helpful to think about what your options are and what makes the most sense for you. I think that a lot of times it's going to come down to two things really. Trust and the complexity of the situation.

Kelly Galardi:

So when you file jointly with your spouse, you basically are taking on the entire tax exposure of both individuals as an individual. So for example, if you are filing jointly and you and your spouse are in a very healthy marriage, and your spouse is hiding income, if the IRS... You fraudulently file a return, you could potentially be on the hook individually for that tax liability going forward.

Kelly Galardi:

If things fall apart, he skips town, you're left with this liability that's assigned to you individually. It doesn't necessarily matter right off the bat that he was the one that kind of screwed things up or he's at fault, or that that tax relates to his income.

Kelly Galardi:

So, there's exposure in filing your taxes jointly because you're essentially exposed to any income or penalties or any income that's being hidden, any deductions that are being falsified and any tax or penalties that would result from that, that they could be assessed against you individually, and often are.

Kelly Galardi:

So let's take a situation where I would advise filing separately, would be a situation where you are separating or divorcing, and maybe one spouse is self-employed and/or runs a business. And there's some, any degree of uncertainty really that that information is not completely accurate. I think it would be a good opportunity to discuss or consider filing separate for both parties. I think that makes sense.

Kelly Galardi:

This is actually something that I think is going to lead into the head of household filing status, which I also wanted to discuss. When you are divorcing or separated, there's another filing status that you can use. That one, or sometimes both spouses can use for tax filing purposes, and that is head of household.

Kelly Galardi:

So for example, let's say you have two individuals that are trying to figure out, they're separated, let's say it's March, okay, it's this time they're in quarantine. And they realized, somebody has got to go get an apartment, this is not working. So one spouse goes out and rents an apartment and maybe they're still working on things, but they're physically separated. And it remains that way through the remainder of the year. So you have two spouses paying for the costs to keep up separate residences, right? And throw a kid in there.

Kelly Galardi:

You are able to file as head of household if you do three things in general. You pay for more than half of the cost of keeping up a household for the year. So in our example, as long as each spouse is paying for the majority of the costs to keep up that household, they're eligible to file head of household.

Kelly Galardi:

Also, you're considered unmarried for the tax year. To be considered unmarried, you need to be living separately for more than six months out of the year. So in our example, it works because somebody moved out during quarantine. So they moved out in March or April. So that works for the 2020 tax filing.

Kelly Galardi:

And then the last criteria is to have a dependent child or a qualifying dependent. So not necessarily a child, a child that could be a grown adult child. It could be a sister that's down on her luck or whatever it is. And that one spouse could qualify as head of household and the other spouse would be forced to file separately.

Kelly Galardi:

And there are benefits to filing as head of household because the standard deduction for an individual filing head of household goes from roughly 12,000 to about 18,000-

Karen Chellew:

Per person.

Kelly Galardi:

Per person, yeah.

Catherine Shanahan:

Okay. So what did you do that... And you got the nerve and you went out and you said, because most people who... You mentioned trust. So whether it be you're the male or the female, who is the one who's getting the nerve to move out and say, okay, I'm not filing because I suspect, or I don't have trust. And I suspect that you're not going to be truthful with the income you're reporting. So I want to file on my own, and I'm going to take this head of household filing status, because I think it's better for me, but my spouse now jumped the gun already filed and filed jointly even fraudulently, because we see that happening. And now, can I still go ahead and file head of household, even though my spouse filed ahead of me jointly?

Kelly Galardi:

And so that's a real issue that you brought up, and I would love to know about who is out there filing tax returns, electronically joint tax returns, without both spouses having signed off.

Karen Chellew:

Many, many couples.

Catherine Shanahan:

The problem is, Karen, I see because you have couples who are married so many years, so they've done it so many prior years, so it's already a signature on file.

Kelly Galardi:

It doesn't count if it's on file, so they should know that. So you need to get what's called a form 8879.

Catherine Shanahan:

Form 8879 signed yearly?

Kelly Galardi:

Signed annually to file an individual tax return electronically, period. And if it's a joint return, both taxpayer and spouse, as it's referred to on the form need to sign. And it's concerning because the issue of trust is huge, and it's really for the accounting firm due diligence that they're lacking in, because that really should be something that they are requiring. And I'm surprised at a firm that wouldn't require that. So I wonder even if a spouse could be fraudulently signing off for another spouse.

Karen Chellew:

We've had accounting firms use the word, oops on more than one occasion. Yeah, because I guess you can press the go button without actually having that 8879 in.

Kelly Galardi:

So the way it works is the pressing, the go button is a human thing to do. A human has to press the go button and the rules from the IRS, and most other states actually also require a similar form. You have to have that form signed in order to press that button. That's why that form exists. It's a major part of the process.

Catherine Shanahan:

So if you're listening to this podcast and you think that could have happened, you could call wherever your spouse may have filed the return, ask them to send you a copy of form-

Kelly Galardi:

8879, yeah.

Catherine Shanahan:

8879, which should have your ink signed copy wet signature and ask them to send you a copy of that. That's great information, Kelly.

Kelly Galardi:

Absolutely. And remember that if you're a client of theirs as well. So if your name is on that return, you have every right to contact and speak with the preparer of your tax return.

Karen Chellew:

That's really good. So I had a situation recently where the discussion was had if they would file jointly or separately, because one spouse figured out that... They were separated, but they figured out that the other spouse was under withholding so that the other spouse would have the most tax burden.

Kelly Galardi:

Like intentionally doing that?

Karen Chellew:

Yes. So they had gone online to one of those tax calculators. I don't know if you think those are accurate or not, and they were just talking to me about how they were going to figure this out, file separately or jointly. And the one spouse was saying that the other spouse intentionally under withheld, so they would get the larger paycheck and the other spouse wouldn't know in the end because they filed joint returns.

Kelly Galardi:

Can you still hear me okay?

Karen Chellew:

Yes.

Kelly Galardi:

Okay. So in that situation... First of all, that sucks. Somebody should not be doing that. That's not the best. And it certainly doesn't create a feeling of trust in filing a joint tax return with that person. But these are the things we're working with here. There's certainly a way to have a true-up, I think, in an agreement.

Kelly Galardi:

There's a couple of different ways to do it. It will never be perfect because the tax is not going to be the same if you separate out those returns and file separately. But an accountant can absolutely figure out, all right, what tax do we want to attribute to the income of these two individuals? The way I would do it, a very easy way to do it would be to look at the income-

Catherine Shanahan:

For each party or the total income for both?

Kelly Galardi:

Look at the income for each party. And most tax [inaudible 00:16:58] will provide you with an analysis of your tax return when they deliver your tax package, and it will say something called an effective tax rate. That's usually listed in... There's something called a two year comparison that goes over certain things, and the effective tax rate is really like the rate you're paying based on all of your income.

Kelly Galardi:

So it takes into account the fact that you have itemized deductions that you both share, or you have a standard deduction that you both share. And even though you're in the 33% marginal tax bracket, your effective tax rate was 22%. Does that make sense after all of the deductions and so on and so forth?

Karen Chellew:

Yeah, it does.

Kelly Galardi:

So I would look at the effective tax rate of that tax return and then apply it to each of the separate income and say, okay, you're liable for this amount of tax, and based on your withholding, you have credit for this amount. And based on the other spouse's withholding, they get credit for their amount, and then they true-up between them. I would put something like that in an agreement if the numbers were sizable enough, and if it was meaningful for these individuals, I would incorporate that into an agreement.

Karen Chellew:

But you would go ahead and tell them to file jointly and then true-up at the agreement versus filing separately. Or maybe you can't make that determination now.

Kelly Galardi:

I can't exactly make that determination now, however, I will say, when you are dividing a marital pot, so you're looking at a pot of money and you're filing taxes, it's generally tax efficient, strictly dollars speaking, to file jointly because that generally produces the lower liability. Does that make sense, Catherine? Do you agree with that a little bit?

Catherine Shanahan:

I do, yeah.

Kelly Galardi:

Okay. I thought you were on mute. I'm sorry.

Catherine Shanahan:

It's okay. I have a lot of noise going on here. I'm sorry.

Kelly Galardi:

No, that's okay. That's totally okay. And a lot of times, that's one of the main parts of the discussion. And I mean, we've worked on clients together and I've had other clients that I've worked with in the past, but there's one I'm working on right now. The difference between filing jointly could be getting a refund or owing a small amount of money versus filing separately. Somebody's paying tens of thousands of dollars.

Kelly Galardi:

And if the pot, if that's coming out of marital money, then that's less to split between the two parties. There are no easy answers here. Generally speaking, there's thought that goes into each particular situation and figuring out what's worth it, and weighing the risk inherent in filing jointly with it. The actual financial consequence of filing separate.

Catherine Shanahan:

The hard part is that you have the spouse who is really intimidated with the tax return, and then you have that same person who feels like they had this great relationship with their accountant, and they're so afraid to veer off from that accountant, and they believe that that account is going to work in their best interests.

Catherine Shanahan:

And just yesterday or the day before, Karen, I think you spoke to a new client in Indiana. And she said, "Oh, I'm so glad I spoke to you. I was just going to meet with my accountant and have a confidential appointment with her before speaking to my spouse."

Catherine Shanahan:

I like that you can have individual relationships with your accountant and that's fabulous, but saying that it's going to be confidential, accountants don't run by those same rules that attorneys run by. And so you know that it's not biased. You're working with their numbers, it's the same number for one spouse as it is for the other.

Catherine Shanahan:

And although you can help both spouses, you can't really sway the numbers to one size. We see it all the time when an accountant is working with the business owner, because they run the books for that spouse. So obviously, the other spouse needs to have their own accountant to make sure that books are being run or they have clarity.

Catherine Shanahan:

So it's disheartening when we see that a spouse doesn't have their own account or they're too afraid really to go get their own accountant. So they don't understand that being head of a household or getting this... Or you can get that reconciliation and then it's okay that you don't have to use the same accountant to reconcile it, what it actually means.

Kelly Galardi:

Exactly. And you don't have to be bullied into... I think it probably is an intimidating situation for a lot of people. If I didn't do this for a living, I wouldn't want to know. It would be one of those things like my gutters or my furnace that I want somebody I can trust to handle it. And I kind of don't want to know. I just want to be taken care of.

Kelly Galardi:

And it's certainly a situation where individuals in that situation should have someone that they can count on to be honest with them and upfront, I will tell you that if you are married and you've been using an accountant to file a joint tax return, and you are divorcing, and you're considering your options for filing, as an accountant, you really can't be... There's an inherent conflict of interest right there.

Kelly Galardi:

You were first representing a married couple that was filing jointly, and now there are competing interests with these two individuals. You can certainly do it, and I've done it before and I will continue to do it, but I need to discuss and disclose that there is a conflict of interest here. And I'm upfront with each individual with this same exact information. There's nothing that I'm telling one person that I wouldn't tell the other person, but generally from that point on, unless they're going to sign a waiver of a conflict of interest, we're having joint discussions on everything, because there is no attorney-client privilege in a relationship. And I can't advise one person the way that they should file without disclosing that advice to the other fairly. I can't treat two individuals as clients, unless they're aware that there is an inherent conflict of interest. Does that make sense?

Karen Chellew:

So if I'm a client and I come to you and I say, Kelly, well, myself and my husband are clients, and I come to you and I say, "Kelly, I'm going to tell you something in confidence. We're going to get a divorce, but I want to know if I need to do specific things to protect myself." That would put you as an accountant in a very difficult situation, I'm sure.

Kelly Galardi:

Oh, absolutely. And I think the conversation there ends and it becomes one of, I can be your accountant for the services of a joint tax return, but if we're going to move forward separately, we need to get separate engagement letters. And I think sometimes that's hard because depending on where you are in the process, but I would tell joint clients that I have in that situation, maybe you should get someone else's opinion rather than mine, because I can't give that. And I know that you all have that same situation too, in the work that you do, I'm sure.

Karen Chellew:

Yeah, and it is concerning when a client comes back or through and says, oh, I had a confidential conversation with the family accountant or the family financial planner or the family anything. Our jaw just drops. How does that happen?

Kelly Galardi:

That shouldn't really be happening, particularly when you're engaged with a couple client. But I'm sure it does happen, which is interesting. Just like tax returns get filed with no authorizations on hand.

Catherine Shanahan:

I always tell the other side to go have their own confidential conversation and let's prepare the notes.

Kelly Galardi:

Yeah, beautifully.

Catherine Shanahan:

I like comparing the notes.

Kelly Galardi:

That's funny.

Catherine Shanahan:

So on that line, this year, a specific issue has been presented with COVID with the stimulus checks coming out that has an extra, is it five or 600 per child? And I think if it's one joint tax return, it's going to one bank account or one address. And that is the recurring question. How do I get my check and who gets the kids' money? And it's almost treated like a paycheck. So how are you responding to that?

Kelly Galardi:

So I have been directing clients to the IRS website. I don't know if you have been exposed to the tool that is out there to check, like where is my stimulus payment? And I wrote down the website for the purpose of this call. So it's www.irs.gov/coronavirus/get-my-payment. So, that's irs.gov/coronavirus/get-my-payment. And you can go on there and type in your individual social security number. They'll verify your identity by asking a couple questions like your address.

Kelly Galardi:

If you haven't filed your 19 return, they may ask for a couple of numbers off of your 2018 tax return to just authenticate you. So you'd want to have that handy. And the IRS will give you an update as to what's going on with your payment. So for example, they may say we don't have enough information, meaning we need a bank account, we need a routing number. They may say your check was deposited on this date, or your payment was deposited on this date.

Kelly Galardi:

If the situation is that you file jointly and they have joint checking account information for you, they're going to direct deposit that $2,400 plus for each of the kids into the joint checking account they have on file, and you can go online and check to see basically if they've done that. And if they have and people are living separately, then each individual is entitled to $1,200 of the stimulus payment. So there's a way, it certainly... What did you say?

Catherine Shanahan:

You [inaudible 00:30:00] luck if your spouse has it.

Kelly Galardi:

Oh, if your spouse has it. But I'm all about reconciling that. I would be such a stickler to reconcile. Add that to the final bill. Add that to what they're entitled to. And I believe that there will be some sort of true-up on the 2020 tax return.

Catherine Shanahan:

That in lies the problem, Kelly, and that's what we need to talk about for divorcing couples.

Kelly Galardi:

Sure.

Catherine Shanahan:

Because that's a problem. So if you're getting divorced and people are truing up now, so I'm kidding when I say [inaudible 00:30:41] so I'm probably getting people all riled up, but it is, we have... Karen's like, "Oh God, we're getting calls tomorrow because there goes Catherine." Look her up there. So we did just help a couple people true-up. But here it is, so now they split the money and what's going to happen next year? They're divorced, and now here comes the tax [inaudible 00:31:11], of course, we're going to have their attorneys tighten up their agreements to say, if there is in fact any money owed back, they're going to have to get together with their accountants and true-up all that language will get at and in there.

Kelly Galardi:

Let's say they file separately.

Catherine Shanahan:

Yeah, let's say they get divorced and something happens. Is there any talk? Will money be owed back on that money?

Kelly Galardi:

I'm not aware that the money is going to be paid back. I really haven't heard anything in that regard. I'm not saying that that's not impossible, we're dealing with regulations on the PPP program right now, which you know, that is changing. And that certainly has been a giveth and then taketh away.

Kelly Galardi:

I haven't heard that or read about that in regards to the stimulus checks. When I say true-up, I really am referring to the fact of, if you were entitled to a payment and you never received it, I'm hopeful that there will be some sort of true-up on a 2020 tax return that says, whoops, you didn't get one in 2018 or let's say you didn't get a payment or a stimulus check because you didn't file in 2019 'til way after the time we were sending out those checks, but it turns out that you really did qualify for one in 2019, so on your 2020 tax return, we're going to give you that 1200 or $2,400 to kind of make equal.

Catherine Shanahan:

Well, there's nothing to consider if you aren't divorced, [inaudible 00:32:58] got one.

Kelly Galardi:

Yeah, I'm hopeful that there will be something. I'm hopeful because there's time to figure that out and refine it because it could be handled with a 2020, what would be a form, a new form for the stimulus check reconciliation. But since there's time, I'm hopeful that the IRS will put something together to make it fair for taxpayers, because I do know a lot of people, it hasn't really worked out for their benefit. For example, the couple that filed jointly had a joint checking account on their return shortly thereafter, divorced.

Kelly Galardi:

Maybe they weren't divorced when they signed the filing, to file jointly for the previous year. And the old checking account, the marital account is retained by one of the spouses and they've got $2,400 and the divorce is done, and that's not fair. So hopefully they'll be a way to true that up that says, I never received this. But you know what? It's just messy. I can't imagine how that would be reconciled, but I'm still hopeful.

Catherine Shanahan:

That's very interesting.

Kelly Galardi:

I feel for people that have separated since they filed and the IRS doesn't have their new address, for example. Were divorced since they filed their most recent tax returns. So I have seen some individuals, when they've gone online to check on their stimulus payment, the IRS has said sometimes we need more information on you. So they're able to give information and maybe get a check issue to be [inaudible 00:35:06].

Kelly Galardi:

I'm sure you see it in the work that you're doing, but it's a very odd time and all this stuff is happening with the stimulus and the paycheck protection programs that I'm uncertain as to how things are going to be reconciled in a fair way. But I hope that there are some solutions coming. Because I do think individuals that are separated or divorced or divorcing, are particularly vulnerable with this stimulus check stuff.

Catherine Shanahan:

Exactly. And it creates a lot of emotion that you don't even know what to do with.

Kelly Galardi:

It's upsetting especially if you have a family that's now split up or just two individuals, no dependents that are split up and times are tough. You go from two incomes paying for one household to two incomes paying for two houses. It's a big difference. So I think that money could really help those individuals, so I'm hoping that there are some fixes put in place sometimes.

Karen Chellew:

There's enough other issues to consider.

Kelly Galardi:

Yes, absolutely. Are you having clients that are getting those monies though? Have you had some clients that have received similar statements?

Karen Chellew:

Yeah.

Kelly Galardi:

Have you seen spouses that were maybe, amicable is the wrong word, but fair enough to split some of the money that came in?

Karen Chellew:

Yeah.

Kelly Galardi:

That's great, both of you.

Catherine Shanahan:

A lot of them make too much money, they haven't gotten them too.

Kelly Galardi:

Exactly. Yeah, that's the other thing.

Catherine Shanahan:

So, they've been pretty good. I think so.

Kelly Galardi:

That's great.

Catherine Shanahan:

Mostly the problem that we see is that reconciling before they get divorced, deciding, a lot of times reconciling are issues and options, the yearly reconciliation that needs to be done. They're finding their own accountant afterwards, the business owners, all of those, those are the clients. And Just the people moving on and feeling confident to get their own accountant to move forward. That's what we get daily.

Karen Chellew:

But we're glad we have great accountants like you, Kelly. You have been fantastic with our clients, and guided them through the next step, so thank you. You've done a great job.

Catherine Shanahan:

Thank you.

Kelly Galardi:

Oh, thank you so much. And I think my internet, I just got a message. It was unstable there for a couple of seconds, so I apologize.

Catherine Shanahan:

I get that often.

Kelly Galardi:

And my concern is really that it's because a child in this house is doing some heavy streaming of either a game that's interactive when they should be doing schoolwork. So after we wrap up, that'll certainly be what I check on. Yeah, I think the homework was streaming a video today. Yeah, I that was it. They had to do it like something on Fortnite. Fortnite really takes up the bandwidth in this house.

Kelly Galardi:

But it's always a pleasure working with both of you ladies and helping your clients. I have a special place in my heart for individuals going through divorce and I'm here to help you and them as best I can.

Karen Chellew:

Thank you so much.

Kelly Galardi:

You're welcome.

Catherine Shanahan:

Thank you. It's been a pleasure, and I think we have many more topics to discuss in the future. So stay tuned and be healthy and safe.

Kelly Galardi:

Okay, thanks to you two.

Karen Chellew:

Bye [inaudible 00:39:42].

Kelly Galardi:

Bye ladies.

 

 

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