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Divorcing Pink

<span style="background-color: #edf5fa">Pink is divorcing motocross racer, Cary Hart. The party is no longer getting started for the couple.  The singer’s publicist, Michele Schweitzer, confirmed that their marriage is over, even though their “friendship has never been stronger.”  Remaining allies during a divorce is often difficult. However, when it comes to you and your former spouse's finances, getting stuff sorted out amicably and prior to the actual divorce can save you a lot of money and heartache.</span>

Double platinum singer Pink and her husband of two years, motocross racer and former Surreal Life (VIA) star Carey Hart are headed for splitsville. 

Rumors that Hart, 33, was cheating on his pop star wife, whose real name is Alecia Moore, 28, began last August. Now the couple confirms through the singer’s publicist, Michele Schweitzer, that their marriage is over, even though their “friendship has never been stronger.” Those feelings of friendship will be good news for their bank accounts come April. According to financial planners, divorcing couples who plan the tax returns of their final year together, often keep more of their own money.

“Treat your to be ex-spouse as an ally, with the government as the third party,” says Gregg Herman, Chair of American Bar Association’s Family Law Section.  In other words, do your tax planning with your future “ex” and you’re both likely to save money. For example, a couple gets a $500,000 profit tax exclusion when selling their home, whereas individually you can only exclude half of that. So it might be advantageous to sell your home before the divorce is final and divvy up the profits. 

Although not as relevant to rich celebrity couples as to the rest of us, the handling of retirement funds in a divorce is important. They should be tax neutral in separating assets, which means take the tax consequences into account when calculating what each portion is really worth. “Say you have a stock account and you’re going to divide that, know what you’re getting, the tax bases, what you have to pay if you sell it,” says Herman. “And, conversely, if there are losses, take that into account because you can offset a certain amount against income.” 

“Maintenance, like alimony, is taxable,” says Jane Euell, a Certified Divorce Financial Analyst in Littleton, Colorado. “The person paying it will reduce their taxes.” With the Harts, that person getting the tax benefit would be the Mrs., the primary breadwinner in the family.

Although not applicable with Pink and Carey—because they had no children together—child support is generally non-deductable and non-taxable. But, if you are receiving taxable support that is not subject to withholding, like alimony, you should rmake quarterly estimates, says Herman. If not, you could be hit by a major financial burden at the end of the year, including a possible penalty for not paying enough income tax through withholding. 

There are multiple tax consequences on transferring retirement assets, and if you’re splitting a 401(k) then you’ll need a Qualified Domestic Relations Order. A QDRO, pronounced “quadro,” is a legal document that usually transfers funds from a 401(k) to the other spouses IRA. Once in the IRA, the money is subject to all of the restrictions of a typical IRA, including a 10% penalty if it is withdrawn before the owner is 59 ½. 

Experts point out that one aspect of the QDRO can be hugely beneficial. “There is a provision that allows for an ex-spouse having a 401(k) transferred, to withdraw money one time only, without the 10% penalty,” says Euell. For example, say a spouse needs to spend $20,000 on legal fees and taxes. When the 401(k) is transferred to the spouse’s IRA, and $20,000 is redirected to a savings account, it is not subject to the penalty. However, this benefit is a one shot deal. If the spouse needs more money from the IRA, the future transfers would be penalized. Conversely, if the spouse takes out too much money, he or she cannot transfer back to the account any amount more than the $2,000 annual IRA contribution limit. And of course, whatever funds the spouse receives are still considered taxable income.

Although we’re guessing that Pink isn’t losing much sleep over the state of her IRA, QDRO, or 401(k), if you’re the one eating the majority of the bread instead of winning it, you should take extra care to be on top of your finances during a split.