The financial implications of divorce: Five things to consider before filing

by Badgley Phelps | Aug 14, 2018

By Mitzi Carletti

We’ve all heard the cautionary tale that 50 percent of marriages end in divorce. In fact, according to the National Center for Family & Marriage Research, the U.S. divorce rate has dropped the last four years measured (2012 – 2016)—reaching its lowest point in 40 years. Although the statistics are moving in the right direction, they aren't that comforting when you find yourself on the other side of the data.

Divorce is extremely emotional, regardless of who initiates it or how amicable it may be. But a divorce decree is final and you won’t have the opportunity to renegotiate an unfavorable settlement. That’s why it’s important to think about the potential financial implications of divorce before you file.

Five things to consider before filing for divorce

1. It doesn’t matter who was at fault.
Many states including Washington, Oregon and California have “no-fault” divorce laws, meaning it doesn’t matter to the courts who was at fault or who initiated the divorce. The spouse that is filing for divorce does not have to prove any fault on the part of the other spouse; he or she simply must give any reason the state honors for the divorce.

2. Where you live can impact the financial outcome of your divorce.
It’s important to know whether you live in a community property or equitable distribution state. In the nine community property states, which include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, all property, including debt, acquired during the marriage is presumed to be the property of the spouses. This means that while both parties own all assets, both parties are also responsible for all debts. In equitable distribution states, it is up to the courts to decide a reasonable distribution of assets and debts.

3. Tax changes have repealed alimony payment deductions.
Previously, spouses paying alimony could deduct it from their taxes, and the receiving spouse had to pay income taxes on the alimony received. Recent tax changes repeal that deduction after 2018. This matters since generally, the spouse paying alimony has a higher income than the spouse receiving alimony and is therefore paying taxes at a higher rate.

4. Divorce can impact your IRA contributions.
According to the IRS, “A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse's traditional IRA. They can only deduct contributions made to their own traditional IRA.”

5. You may have to pay capital gains tax.
If you opt to sell your home during the divorce, both spouses can exclude up to $250,000 in capital gains from their taxable income. Should one spouse continue living in the home but the other remain a co-owner, and they decide to sell later, it’s important to document this agreement so that, when sold, both the resident and nonresident owner are still entitled to the $250,000 deduction.

How to prepare

Divorce is a major change and it’s important to take several steps to be prepared. Thinking about how much it will take to maintain your lifestyle as a single person, review credit card and bank statements for at least one year for insights. Then, take inventory of what you own. It’s important to uncover absolutely everything because it can make a difference in what you receive in a divorce and how comfortable your life may be after the decree is final. In addition to researching the value of your real estate investments, personal property, life insurance policies or annuities, take inventory of your investments or stock option plans and identify and quantify liabilities (e.g. mortgage balance, outstanding loans, tax liabilities, credit card debt).

In addition, it’s critical to find the right family law attorney for your unique situation. It will require some work, but it’s one of the most important decisions you will make in this process. Take time and identify what is important to you, formulate the questions you need answered before walking into the law office, and interview more than one attorney. This is a critical moment in your life and you want to make certain you are working with someone who is truly listening and understands your goals. Working with an attorney whose values are not aligned with yours will be frustrating and make a difficult process even more trying.

We recommend you begin by asking for referrals from people you trust and respect. Keep in mind their situation may not be exactly like yours but it is a great place to start. You can also contact your state bar association which often provides a referral service. A good attorney comes at a price but it can be much costlier going it alone.

Finally, getting the most from your attorney requires being prepared. Have the necessary financial information organized in a presentable form. Use this checklist as a guide when collecting the documents and information you’ll need—ideally prior to meeting with your divorce attorney. This will speed up the process of discovery for the attorney and may be more economical because you are providing the groundwork and they can focus on the big picture.

Surviving divorce

Divorce may well be one of the most difficult challenges you will face. The process can be trying but you can mitigate that pain by doing your homework, being prepared, selecting the right attorney, and keeping your emotions in check.

In the words of family-law powerhouse Laura Wasser J.D., “Once you do embark upon the separation or divorce process, it is important to remember three key things: Be kind, be reasonable, be brief. Remember that this person will no longer be your spouse, but he or she will continue to be your co-parent, family member and perhaps business partner in certain assets or entities.”





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