There are many factors to consider in the midst of a divorce or within the divorce process. Finances are arguably one of the most important aspects of a marriage to sort through, especially in light of taxes and debt(s), credit, and investments that may have accrued or been acquired during the marriage.
When it comes to preparing your financial assets and information during a divorce, it’s crucial to stay organized and to closely monitor all financial activity. Doing so will allow you to make the most of your legal counsel and hopefully ease the process as much as possible.
Here are 7 financial steps to consider when going through a divorce:
Prepare a well-organized list of the financial assets and liabilities accrued over the course of your marriage. This includes any debts accumulated, assets owned, and all documents in regards to insurance, life, health, pension, and any other retirement benefits. Be sure to include debts that are owed separately and jointly, including your mortgage, credit card debt, auto loans, or any other liabilities that you may have.
Try to maintain credit in your own name, if possible. If the name on your credit account changes after a divorce, lenders may ask you to reapply to see if you meet the qualifications of their credit standards. As a best practice, it may be best to contact the credit bureau directly and ask for your information so that you can make any changes necessary and start taking steps to improve your own credit history.
Consider any financial commitments that you or your spouse are considering making. This can affect the way you decide to proceed with your financial information and the division of assets. This is especially important to consider when it comes to the cost of getting divorced, as legal fees can add up when the process gets complicated or things out of your control happen.
Cancel your joint accounts as soon as you can. We know that it may not be possible to always know about your situation in advance, but you should try to separate your joint accounts as soon as you’re made aware of an impending divorce in order to avoid any payments that may be collected under a joint credit card. Additionally, you should continually monitor your expenses and any marital funds that may be being spent irresponsibly.
Make sure to find your own attorney if you’re looking for legal counsel for specific issues with regards to child custody, alimony, or assets. It’s important to note that the cost of getting divorced is not typically a deduction, although in special cases such as fees paid towards legal divorce proceedings for income or estate tax advice, or expenses used to decide alimony amounts, can be deductible. Additionally, you should ensure that the agreements of your divorce will address various topics such as insurance coverage, life health, property division, auto, and more.
Learn about the tax implications for issues like child support, alimony, and property settlements. Child support is not deductible to the payer nor is it taxable to the recipient. However, alimony is taxable to the recipient and deductible to the payers as it’s considered a payment in accordance with a divorce agreement other than child support. Lastly, property settlements do not become taxable income, gains, losses, or deductions in the event that they get transferred among spouses. Instead, the recipient will receive the cost basis of the property, which they may choose to share equally based on a fair market value.
Last but not least, think about your retirement accounts and investments. Divorce can greatly alter your retirement trajectory and/or your long-term goals, so you may need to readjust your investment portfolio as your divorce becomes finalized. Specifically for IRAs, if in accordance with the qualified domestic relations order or other order of the court, your IRA plans are separated as non-taxable only if the assets stay in the retirement account or IRA. Once allocated, those funds will be taxed to the recipient.
Whether you’re in the process of getting divorced, or your divorce has just been finalized, our professionals at Sorge CPA can help you reevaluate your financial and investment portfolio and goals, as well as help you save with our tax management services.
If this is you, we’d love to talk more about your financial situation and help you with our decades of financial planning expertise.