Divorce is not only taxing emotionally and physically, but it can take a toll on both parties financially as well. You and your spouse will need to make decisions that not only affect you right now but also in the future. When it comes to the financial impact, here are some of the biggest challenges you may experience during a divorce.
Challenge #1: Dividing Your Property
You accumulate a significant number of assets during a marriage. The question is, how should everything be divided between both parties? Usually, the division of property is determined in a court of law or from an agreement between the spouses.
However, there are several states that are considered community property states including:1
- New Mexico
This means that marital assets and the debts that are incurred by either spouse during the marriage are split 50-50.1 All non-community property states divide the assets “fairly” at the discretion of the judge.
Challenge #2: Tax Implications
There are tax issues that can arise from a divorce, which is why it’s so important to speak to an experienced financial professional when navigating tax status changes.
Some tax-related concerns that can arise during divorce include:
- Who will get the tax exemption for dependents?
- Who will claim Head of Household status?
- Which attorney fees are tax-deductible?
- Will “maintenance” payments be tax-deductible?
- Is child support deductible?
Challenge #3: Who Will Pay Your Debts?
It’s important to understand how much you owe and to whom you owe it. Obtain or make a report that includes all debts owed, how much and whose name the debt is in. Make yourself aware of any debt accrued after separation has taken place, as you could be responsible for debt your partner took on during the divorce process. Along with your team of professionals, you will need to determine who is responsible for what debt and how much.
Challenge #4: Retirement Planning
If you or your spouse have retirement savings accounts, like an IRA or 401(k), the accounts may be divided between the two of you. If done properly, neither party will be required to pay the usual penalty tax. This can be a complicated process, and it is recommended that you work with a financial advisor to complete the transfer.
If you are losing some of your retirement savings, you’ll want to work with your advisor as well to determine how you can work to account for the loss in funds between now and retirement.
How to Be Financially Proactive During Divorce
With a divorce underway, there are a few things you can be doing now to help adjust yourself and your family to new financial circumstances.
Tip #1: Monitor your Expenses Closely
While you want to do this regularly, it’s more important than ever to keep track of how much you’re spending. If you are used to being in a two-income household, suddenly cutting that in half can be difficult. Make sure you are budgeting appropriately so that you can best provide for not only yourself but your children (if applicable).
Tip #2: Check with your Human Resources Department at Work
Find out how your employee benefits and insurance will be affected while going through a divorce. If you have insurance policies or retirement accounts through work, be sure to update your beneficiary information immediately.
Tip #3: Establish Your Own Checking Account
While you’ll want to work with your attorney before withdrawing from or closing any existing joint accounts, you can still begin establishing your own checking and savings accounts in the meantime.
Tip #4: Apply for a Credit Card in Your Own Name
You will have less income coming in after the divorce, so it could be more difficult to open a new credit card. Plus, you’ll want to close any joint credit cards down immediately to avoid being liable for debt accrued by your spouse. Open your own credit card, and begin using that one instead.
Experiencing a divorce isn’t easy, but making sure you are financially ready to start your new chapter can make things a little less stressful. Speak with a trusted financial professional to figure out how to best get your finances in order so that you can start fresh and look forward to a strong financial future.