5 financial considerations in a divorce

Divorce involves many loose ends, both emotional and financial. If you’re considering or going through a divorce, you need to determine how assets and liabilities will be divided between you and your former spouse. 

Financial considerations during a divorce

While it can feel overwhelming, a focus on five financial considerations can put you on track to successfully transition to your new life. Keep in mind that laws can vary by state.

1. If one spouse is the primary income earner

• Spousal maintenance payments. Formerly known as alimony, spousal maintenance payments are arranged when one spouse is non-earning or makes substantially less money than the other.
• Child support. If there are minor children who will be cared for primarily by one spouse, the other spouse may need to contribute child support payments on a regular basis. If one spouse carries health insurance for the children, premiums and deductibles for doctor visits may need to be contributed as well.

2. How to divide your primary residence

• Staying in your current home. If you have a desire to stay in your current home, you may need to refinance in your name and allow your spouse to keep a larger share of another asset to create an equitable distribution.
• Costs related to your current home. Keep in mind that your current home may require significant investments in maintenance and upkeep that could make it expensive to retain. Determine how previously planned improvements or repairs will be paid for and keep a record of items paid for by jointly owned assets.
• Selling your current home. If the house is included in one spouse’s portion of the settlement, calculate projected realtor’s costs for eventually selling the house and subtract half from the equity portion paid to the spouse who does not retain ownership of the house.

3. How to divide your retirement plans

• Equitable distribution of retirement assets. Retirement savings are typically split on an equal basis, although not in all cases. Funds saved before marriage might be considered separate property. An equal distribution is particularly important for those divorcing at age 50 or older, where retirement plan savings may represent a significant percentage of a couple’s combined wealth.
• A Qualified Domestic Relations Order (QDRO). QDROs arrange the transfer of part of the assets in a workplace plan or IRA to an ex-spouse’s retirement account. The transfer can be made directly from one account to another to help avoid a 20% withholding tax on the transaction. The person receiving retirement assets in this manner has a one-time opportunity to withdraw any amount of this money without a 10% early withdrawal penalty.

4. Understand Social Security benefits

• Spousal benefits. Once you reach retirement age, you can claim spousal Social Security benefits based on your ex-spouse’s earnings, provided that you were married for at least 10 years. This is allowed as long as the benefit you are entitled to is larger than the benefit you would receive on your own work record. You also must have been divorced for at least two years and remain unmarried.
• Calculating benefits. The spousal benefit will equal one-half of the benefit of the ex-spouse if both have reached full retirement age (full retirement age ranges from 65 to 67, depending on date of birth.) If you start receiving benefits prior to full retirement age, your benefits will be reduced. Review all options to maximize your Social Security benefits.

5. Divorce and taxes

Divorce can affect your taxes in many ways, from how you file them to potential credits and deductions. Consider working with a tax professional to help you understand your options and minimize potential tax liabilities.

• Filing status. Filing taxes after divorce means you no longer file as “married, filing jointly,” effective in the year when the divorce is finalized, as recognized by state law. You’ll need to choose whether to file as a single person or, if you qualify, as a “head of household.” Each can have tax benefits, depending on your situation.
• Mortgage and property taxes. A determination must be made on how to handle mortgage and property tax deductions in the year of the divorce — will it be split, or will one spouse claim the deduction and compensate the other spouse for it? Certain assets, when liquidated, may also be subject to tax (see capital gains tax section below). As decisions are made about how to equitably divide assets, be sure to consider their after-tax value.
• Capital gains tax after divorce. If you liquidate assets as part of the divorce, such as a house, any profits may be subject to capital gains tax, depending on the type and value of the asset.
• Maintenance payments. For divorces prior to 2019, the person making maintenance payments can deduct that amount on his or her tax return. The person receiving the payments will need to claim it as income. However, effective for divorces in 2019 and later, maintenance payments will no longer be a tax deduction or treated as income.
• Child support payments. These payments are not subject to income tax for the recipient or considered deductible by the person making the payment, but a child tax credit and exemption can be claimed on a tax return. Generally, the person who retains custody has the right to those claims, but the right can be transferred to the noncustodial parent.

A divorce financial checklist

Dividing money and assets in a divorce is challenging. Consider using this financial checklist to help ensure you’ve covered your bases.

• Gather key financial documents you’ll need to form any kind of divorce settlement, including:
  • The most current statements of all accounts (bank, checking, savings, credit cards, investment, retirement plans, etc.)
  • All documents relating to loans
  • Recent credit card statements
  • Pay stubs or W-2 income statements as well as tax returns for recent years
  • Titles to property (homes, cars, boats, etc.)
  • Insurance policies (including life, health, property, etc.)
• Account for all assets that were retained in the name of one spouse prior to marriage or inherited by one spouse and/or kept in a single name. These can potentially be excluded from “marital assets” that must be divided.
• Open a new individual checking account for your future deposits and expenses.
• Review your fixed expenses and expected income to get a handle on how the divorce will impact your finances.
• Make sure all bills are updated to reflect your name only and are paid on time to help ensure you maintain a high credit score throughout the divorce process. Be certain taxes are paid and tax returns are filed on time as well.
• Update beneficiary designations on insurance policies, IRAs, annuities and retirement plans as appropriate.
• Review and update wills and other estate planning documents.
• Consider using a divorce mediator to help minimize legal costs associated with a divorce.

Seek out professional advice

A divorce mediator or attorney experienced in handling divorce matters is important, but you should also consider working with a financial professional to help assess your current and future financial situation. They can provide guidance on how to best protect your assets and prepare a plan for going forward on your own.

Working with a financial professional can help make the path to your financial goals clearer. Learn about our approach to wealth planning.