A CPA That Approaches Financial Disputes Differently: An Interview with Steve Kaplan
Steve Kaplan is a CPA, Business Valuation Expert, Financial Advisor and Founder of S. Kaplan CPA in White Plains, New York. Steve recognizes the harms of divorce and his practice is dedicated to understanding the needs of his clients so that he can provide dispute resolution services that are clear and pragmatic. With over three decades in public practice, Steve helps his clients with their dispute resolution, settlement support, business valuation and forensic accounting needs. Steve focuses on helping his clients to come to a financial resolution in a respectful way.
Steve M. Kaplan was interviewed by Divorceify Co-founder, Sonia Queralt.
Sonia: Tell me about what your role is as a divorce professional and how you help people through the divorce process.
Steve: I’m a CPA and within the world of divorce work, I’m generally known as a financial professional and actually a better way to explain what I do is I very often serve as a financial educator. Meaning that there’s a lot of jargon out there and it’s my job to take things that are very complicated and nuanced in terms of the world of finance and tax and business valuation and take all these things and reduce them to a point where people can understand what all these things mean. More importantly, I use that information so that my clients can make well informed decisions for themselves to help them craft a settlement that they understand and is financially sound. Another role of my job is to act as a translator, because many times what people want to accomplish doesn’t square up with what the financial and tax tools allow us to do. It’s my job to translate that and say, “I hear what you want to do and here’s the right way to do it in from a financial or tax perspective.”
Sonia: What are some things that people should know about taxes when it comes to divorce?
Steve: I want to start off with something that’s easy for people to understand and also to realize why it’s important to pay attention to taxes. If I were to say to you as options for possible settlement, you have choices A and B. Option A is a thousand dollars in the savings account and option B is a thousand dollars in an IRA account. Some people may say, “Well, a thousand dollars is a thousand dollars, so I’ll take either one,” or they may say, “an IRA, that sounds good because it’s money for the future.” But the thing that I’m sensitive to is that this is a tax discussion because if you take that thousand dollars as an IRA account and you would withdraw it, it still has to be taxed at some point in your retirement years. So do you want the thousand dollars upfront or do you take a thousand dollars and be taxed later in which case option B is actually something that’s worth less? The other challenge with option B is that if we want to make things equal it is actually not so easy because I don’t know how many years in the future you might be withdrawing the money from the retirement account, and more importantly, I don’t know what the tax rate is going to be at that time. The important takeaway is that although the two options seem equal, they in fact are not. I help people understand how to make them equal and/or to understanding the pros and cons of each choice.
Sonia: What are some key things that clients need to think about when it comes to alimony?
Steve: Traditionally the way that alimony has worked is that the payor, the one who’s making the alimony payments, gets a deduction on their tax return for the alimony payments that they’re making and the payee, or the recipient of the alimony, picks it up as income on their income tax return. So let’s say you’re the recipient and you will be receiving $100,000 of alimony. That might be $25,000 of income tax that somebody had to pay on that as a recipient. In reality it meant that their funds available for spending was only $75,000. On the payor side, that same $100,000 might get a greater tax benefit and the true cost to them is $60,000, as compared to the recipient which was $75,000. The difference in the number is because typically the payor is in a higher tax bracket. Historically, one of the benefits of alimony was that you’re taking advantage of that gradient in the tax rates. As I would say to all my clients, we use the tax code to make an eight-inch pie into a 10-inch pie. Therefore part of my job has always been not only to explain alimony but also to quantify it so people know what it means in dollars and cents. But that’s now an exercise that only pertains to people who’ve been divorced in the past, a very important distinction. Why do I say that? The tax bill that was passed at the end of December in 2017 had a feature that permanently changed the way alimony is taxed and the change was effective as of January 1st of 2019. One of the changes Congress made to alimony is that for new agreements, it is no longer deductible to the payor. What that means is that from my earlier example, the $100,000 that’s paid out is $100,000 received and available for spending since there’s no adjustments for taxes. As a result, if you’re the recipient, that same $100,000 previously worth $75,000 net of tax, is now $100,000. As a recipient it might sound pretty good to you. On the payor side though, that $100,000 that you’re paying and previously cost you $60,000 net of tax benefit, that really now costs you the full $100,000 outlay, making it more expensive overall. As we move into this new realm, settlement negotiations are taking into account these new realities, with my tax and financial input being important inputs to the discussion.
Sonia: Why should clients be thinking of getting a financial professional like yourself on board from the very beginning of the process?
Steve: I like being there from the beginning of a case because you may hear certain things that might seem innocuous in the beginning but could be very relevant later on, so it’s helpful to be there at the beginning to understand things. Also, if I come in half way into the process, and it turns out information needs to be gathered or organized, an unnecessary delay is encountered, which sometimes interferes with momentum. At other times, without my presence from the beginning, a false financial or tax premise may result in going down a path without a solid or appropriate foundation.
Sonia: What’s something else in terms of in the financial picture that when people are going through a divorce should be cognizant of and start thinking about also right from the beginning?
Steve: I think one important thing is be aware of your finances and take stock of things. If you’re thinking of getting divorced, take note of what everything is. Sometimes sadly in divorce, all of a sudden people try to hide things or misrepresent things. So be your own advocate as far as knowing the existence of accounts. Ask questions. When you’re asked to sign a tax return, make sure you know what it is and write things down. One of the things I find when somebody comes in to see me for the first time, divorce is a very emotional process and very confusing, difficult process. I always ask my clients to write down all the questions and comments that they have in advance before they come in because invariably sometimes people will otherwise forget something during our initial discussion. Clients should think about what questions they have. I find timelines to be extremely helpful and when I’m looking at financial information I can make certain connections and really understand the full extent of that client’s financial picture. Client should also think about not implementing plans right away post-divorce because sometimes it’s very expensive to get out of certain investments that they might make. So take time. Be reflective. Ask questions of a prospective financial advisor who will be tasked with creating and implementing a plan. See what their philosophies are of doing things and consider those type of things that are really important to you because the goal is to find the type of professional who is of a like mindset and will respond to your questions.