Going through a divorce is, understandably, a very emotional time for the whole family. Despite being an emotional time, it is also a time when you have to try to think reasonably about your options when dividing assets in a divorce. This can be a challenge when everything gets thrown at you at lightning speed, but having an experienced divorce attorney to explain some important financial implications in your case makes dealing with your assets and finances more manageable. Here are just a few key areas to focus on and consider when trying to minimize the financial impact of divorce on your life after the divorce.
3 Areas to Help Minimize the Financial Impact of Divorce
Just about everything about your tax situation is going to change upon divorce. You will have a new filing status, a different tax bracket, and possibly a change to the number of dependents you claim if you or your spouse will get to claim the minor children, or you alternate. You should consider the tax implications of divorce before your case is final so you can adjust your withholdings appropriately on your paychecks. You don’t want to overpay taxes, leaving you with less money to use during the year, and you don’t want to underpay either and potentially owe significant funds to the IRS at the end of the year.
You also need to consider your future liability when it comes to your income. If you have dividends, or sell stock, or withdraw funds from your retirement, this could negatively affect your tax liability for the next tax year. Consider meeting with an accountant or other tax preparer so you won’t be surprised about your tax liability once the divorce is finalized and any impact from the divorce is minimized.
It’s important to remember that not all retirement accounts are the same. There are retirement accounts that offer a set payment to you each month upon retirement and defined benefit plans, which are usually pensions. The longer you work, the larger your monthly payment will be from the pension plan. There are other retirement plans which are defined contribution plans and include IRAs and 401(k) accounts, and the like. These accounts allow you to withdraw funds upon retirement age (with certain limits set by the federal government), but the balances of these accounts fluctuate based on the types of investments you have. Any funds added to the IRAs or 401(k) accounts during the marriage, and any pension benefits that accumulated over the years of the marriage, are all considered marital and subject to division in a divorce. When trying to reach a settlement in your case, it is common for the parties to try to offset debts owed, and cash from accounts so that less money has to change hands at the end of the day when dividing assets. Reaching a settlement is great; however, you should consider what accounts offsets are being made from. There are tax consequences and penalties for taking out IRA or 401(k) funds early, and these consequences should be considered when making any sort of trade-off for funds that are not taxed like equity from real estate, or funds from the division of a bank account.
The Marital Residence and Real Estate
When there is marital real estate property in a divorce, the property can be sold, or awarded to one of the spouses. When it is awarded to Spouse A, that spouse has to buy out the equity of Spouse B. Many times, this requires Spouse A to refinance the mortgage, at whatever the current interest rate is, and take out additional funds to pay Spouse B their equity. Additionally, being awarded this real estate property also means Spouse A will be responsible for the mortgage, real estate taxes, homeowner’s insurance, utilities, repairs, and everything else that comes with the house. This can lead to a gigantic change in finances after the divorce for Spouse A; there is more debt now and more bills, often over and above what Spouse A can afford in the long run. You should always think twice about whether you want to keep the marital residence or other marital real estate property, as it could cause financial issues later if you have not adequately analyzed and determined if you will be able to afford the property and your usual living expenses, along with any minor children’s expenses, in the future. Owing a home is a huge expense, and although you might be very attached to the marital residence, or want to keep it for the children, sometimes it is not financially worth it to keep the home when you could get cash instead that you can use to find something more affordable that you are able to manage.
These are just a few things to think about if you want to get ahead of the game and minimize any financial impacts that a divorce might have on your life. Be sure to talk to an experienced family law attorney, like those at Anderson Boback & Marshall, about other ways to lessen the financial impact of divorce in your case.