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After many years of dealing with client divorces, I have come to the conclusion that the process of going through a divorce is more catastrophic than a death of a spouse. Getting a divorce is very emotional and enormously stressful, whether you are rich, poor or middle-class.
From a financial standpoint, unless you’re wealthy or earn a significant income, divorce is financial suicide. If you are middle-class, it will take ten years or more to financially recover from a divorce. If you recover. Many don’t and are eventually forced to file for Personal Bankruptcy. So, before getting a divorce, consider the financial and health impact on your life and the lives of your children, very carefully.
In a divorce, there are typically three types of payments that are made between spouses:
- Alimony
- Property Settlements and
- Child Support
For anyone getting divorced after 12/31/18, Alimony is no longer included in Taxable Income for the Ex-Spouse recipient and no longer a Tax Deduction for the Ex-Spouse Payor.
Overview of Divorce Issues:
- Alimony must be paid in Cash, meaning Alimony does not include Property Settlements.
- Liability for Alimony typically ends either after an agreed-upon number of years, or upon the death of one of the Ex-Spouses.
- For the most part, Legal Fees paid in a Divorce are not Tax Deductible.
- Any increase or decrease in Alimony must be approved by a court.
- Property Settlements are treated as a tax-free exchange if they are part of the Divorce Decree. Such property settlements must be transferred within one year.
- Funds in an Ex-Spouse’s Pension Plans, 401k Plans, 403b Plans and 457 Plans can be transferred Tax Free and Penalty Free to the Ex-Spouse Recipient via something called a Qualified Domestic Relations Order (QDRO), pursuant to the Divorce Decree. QDRO payments must be made directly from the retirement plan (Direct Transfer).
- IRAs and Annuities do not require a QDRO from the court. The Ex-Spouse Recipient is not taxed on such transfers, if they are pursuant to the Divorce Decree.
- Sale of Principal Residence Pursuant to a Divorce – Each spouse can exclude up to $250,000 of their portion of the gain, even if one Ex-Spouse moves out of the home and would not otherwise qualify for the $250,000 Gain Exclusion.
- An Ex-Spouse who retains custody of a child (or children) may claim Head of Household Tax Filing Status when filing their annual Federal Income Tax Return.
- An Ex-Spouse, married at least ten years to the same Ex-Spouse, may qualify to receive Social Security Benefits based on their Ex-Spouse’s Social Security Account.
- Life Insurance – Most Spouse’s are listed as Beneficiaries on Life Insurance Contracts. After a Divorce, each Ex-Spouse would need to determine if they must file a Beneficiary Change Form to remove the Ex-Spouse as Beneficiary from their Life Insurance Contract.
- Health Insurance – An Ex-Spouse covered under their Ex-Spouse’s Employer Health Insurance Policy has up to 36 months after the divorce to continue under their Ex-Spouse’s Employer Health Insurance Policy. During this 36-month period, the Ex-Spouse who is continuing their coverage under their Ex-Spouse’s Employer Health plan must pay monthly COBRA Premiums, in order to continue their coverage.
- College Funding/Costs – Part of the Divorce Decree will assign financial obligations on each Ex-Spouse for the Funding or Cost of College for their children.
- Titling must be changed on all Property that was, before the Divorce, jointly held. Homes, Cars, and other assets that require Titling must be changed, post Divorce.
- Name Change – Will you be changing your name back to your maiden name? In some cases, doing so can affect your ability to secure a loan, since your maiden name will have less credit-reported history than your married name. Because of this, many Ex-Spouses retain their married name.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, Effort-Less Wealth, Change Your Habits Change Your Life, Rich Habits Poor Habits and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
