Divorce is an understandably uncomfortable topic for many individuals. However, it is essential to know how to respond when something unexpected occurs, especially for your finances. These are things you must know regardless if you are in a relationship, engaged, married, considering getting a divorce, or going through the divorce process right now.
While no one wants to consider the possibility of divorce when they enter into a loving and committed relationship, knowing how to navigate one is a responsibility for yourself and your family. Unpreparedness can lead to financial issues in the event of a divorce.
It helps to remember that knowing what to do in case you experience divorce is like preparing for any other potential issue. For instance, when you are taking driving lessons, you learn the basics for when you get a flat tire, or your car’s battery gives out. These are unideal scenarios, but you need to know what to do in case, nonetheless.
How Does Divorce Affect Your Finances?
There are several aspects to look at when considering how to approach the safety measures you should take for divorce. The following are essential factors to review and how you should handle them:
How you file your taxes change
Your filing method as a single person can be one of two statuses: as a single filer or head of household. Single filers are unmarried individuals who do not belong in other tax filer categories. On the other hand, heads of household filers are those who pay more than half the expenses of taking care of another person.
Head of household filing is best if you are responsible for a child because you are more likely to pay lower taxes. This is especially helpful for low-income parents.
When in doubt about the best approach to your post-divorce taxes, feel free to approach tax relief experts. They can help you devise a plan that saves you money in the long run.
Your assets may be divided
How assets are divided because of divorce vary from state to state. This is one of the more tedious processes in a divorce, as disagreements usually occur on how assets such as real estate, business assets, and collectible items (such as art) are distributed between both parties.
Even before divorce discussions occur, take inventory of all of your assets, from bank accounts, investments, vehicles, and other items you own. You should also have a lawyer who is well-versed in your state’s laws so that they can act in your interest when negotiations occur.
Your retirement fund will be affected
You will likely have to divide even your retirement assets during divorce processes. There are two kinds of retirement plans that you can split between you and your former spouse: IRA or qualified plan, which dictate your approach.
For qualified plans, a qualified domestic relations order is needed to divide assets among the owner, former spouse, and any dependents. These transactions are tax-free should the IRS approve its status as a QDRO after reviewing its compliance with the Employee Retirement Income Security Act. If they do not approve of them, however, there are taxes and penalties involved.
For an IRA, you may get tax-free transfers if the transfer is done directly from the ex-spouse’s IRA to the other one and if the retirement asset division is clearly labeled in your divorce agreement. Otherwise, there will be taxes and penalties to pay.
Your monthly income changes
Different women find themselves in different positions during a divorce. Some earn their own income. When raising children, there may be changes in the division of responsibilities in supporting your child.
Some women find themselves in a contrasting position, however. Some leave their full-time jobs to stay at home and run the household. In the event of a divorce, work with your accountant and lawyer to find out how much you need to earn post-divorce.
Discuss how much spousal support you may require, too. Note that there are two categories: short-term for short marriages, which you can already receive while the divorce is being finalized, and permanent support.
Short-term support has something called “rehabilitative support.” which helps a dependent spouse prepare to find a job again. The court usually grants long-term support for marriages that lasted long and if they deem that the dependent spouse will need support for a longer period.
Unexpected life events, such as divorce, do not have to take your personal finances by surprise. Knowing the above will help you ensure that you and your children or other dependents remain secure even after the divorce.