Three Financial Mistakes to Avoid During a Divorce
The distribution of assets and debt can be one of the most stressful aspects of a divorce. It is difficult to dismantle the life and future that you and your spouse spent years building together. The choices you make while splitting up marital property and making other financial decisions can carry some high-stakes consequences that may cost you dearly in the long run. To present your best cards at the negotiation table, be sure to do your research and due diligence on any potential long-term financial implications before committing to anything.
Not Considering the Tax Implications.
As you and your spouse divide your assets and financial responsibilities, remember to consider the tax consequences of your decisions. Choices regarding custody, alimony, and transfer of property could cause you to pay higher taxes or miss out on a deduction. The parent with primary custody of the children is usually allowed to claim the children as dependents, unless a different agreement is reached in the divorce settlement. Assets that are worth more now than when you acquired them could be subject to capital gains taxes. Spousal support received will count as income, while spousal support paid counts as a deduction.
While you are still married, you have the option to file your taxes jointly or separately. While filing jointly may allow you certain tax advantages, there are certain situations in which it is beneficial to file separately, such as when one spouse owes back taxes. Before making any significant financial decisions in your divorce, we recommend seeking advice from a tax professional.
Forfeiting Your Share of the 401k
As couples look forward to retirement age, IRA, 401ks, and pensions make up a significant portion of a couple’s resources. Still, retirement accounts are among the assets most likely to be “forgotten” in the divorce settlement. Divorcing spouses are often hesitant to divide their retirement assets since withdrawing funds prematurely can result in fees and tricky tax situations.
However, in the event of a divorce, 401k accounts (and most pension plans) allow you to transfer a portion of your assets to your ex without being subjected to early withdrawal fees. To avoid the penalty, a Qualified Domestic Relations Order (referred to as a QDRO) must be issued. A properly executed QDRO is necessary to ensure your share of your former spouse’s retirement accounts will be made available to you.
Not Getting Insurance for Domestic Support
If your future ex is paying alimony or child support, you may depend on that income to provide for your family. It is a good idea to purchase a life insurance policy on your former spouse, so you can be protected. It is also common for a divorce settlement to require the paying spouse to carry a life insurance policy with his children and/or former spouse listed as beneficiaries.
Need Legal Assistance? Call a Virginia Divorce Attorney.
An experienced divorce attorney can help you make practical decisions to protect your future. If you are considering divorce, contact the Leesburg attorneys at Whitbeck Cisneros McElroy P.C.