Tax & Financial Impacts of Divorce: 10 Mistakes to Avoid

Divorce is something no one hopes will happen to them when they get married. Unfortunately, almost half of all marriages end in divorce. Since few people have pre-nuptial agreements, most divorces involve often bitter tangles over children, money, and assets. When it comes to the tax and financial implications of divorce, often your divorce attorney is not the only one you should rely on for advice.

I have found ten very common mistakes that people make in the divorce process. A tax or financial pro can help you avoid them.

1. Don't let emotions guide you in determining the divorce settlement. Divorce is about a lot of things, but is caused mainly by emotional issues or financial problems in the marriage. You may love or hate your soon-to-be ex, but you cannot rely on your "gut" feelings that they will do right by you or the children. You must make the settlement using reason and planning for the unexpected. He or she may want to pay a large alimony and a small amount in child support by telling you they want to see you are "taken care of." That may result in less tax for them, a lot more taxes for you and destitute children should you die before they reach 18. Financial planning is critical.

2. Get a good family law attorney, but don't forget to hire a financial professional to assist in evaluating assets and financial strategies. It may cost extra fees, but it will result in a far better settlement for you in most cases. A Certified Public Accountant (CPA), Certified Financial Planner (CFP), or an Enrolled Agent (EA) can be of invaluable help. What is the house really worth? If a business is involved, what are the consequences of its disposition or the true value of it in the divorce settlement? Your spouse might tell you their business is losing money or has no assets; you need to know the truth!

3. Getting the house in the divorce is not always a good deal. Women often want the house in the divorce because they are raising a family in it or have decorated it and are emotionally attached to the property. If it has a mortgage attached to it, think long and hard about the house. It might be better to sell it and split the equity. If you aren't working and are raising kids, do you really want a big mortgage payment?

4. Failing to fight for the most child support you can get! Large alimony and low child support payments are generally not a good deal to the spouse getting the payments. Alimony is tax deductible to the party paying but taxable to the party who receives it. A large payment is a large tax deduction for one party and a big tax burden to the person getting it. Child support is tax free to the recipient and not deductible to the payer. Also, alimony may terminate upon marriage or death, but Child Support continues until the child reaches 18.

5. Failure to specify who can claim the kids on the tax return. The divorce should specify who will be entitled to claim the children. Also, Form 8332 Release of Claim may need to be filed with IRS in some circumstances.

6. Lack of planning with regard to life insurance. Life insurance should be reviewed in the event of divorce. You may want to take your ex off of your policy as beneficiary, but do you really want to make your children beneficiaries? Unless they are over 18, this can be a big mistake as the funds may go to a trustee until the kids reach majority. Consult with your attorney on how to style your life insurance to best provide for the kids. If you are the person getting alimony or child support, it is a very good idea to carry a life insurance policy on your ex in the event of death. Otherwise the money stops coming and you may end up homeless.

7. No income modeling done in the calculation of alimony. Your spouse may be a corporate executive and have great future earning potential. He or she may have stock options. An income model should be made to determine the potential they have and how it can affect your claim in the divorce.

8. Failure to secure a Qualified Domestic Relations Order (Quadro) in the event of a 401K or other tax impacted investment that is divided in the divorce. If you don't do the right thing, huge tax penalties can be imposed on taking money out of IRAs, 401Ks, or Annuities. A good family law attorney can help with this but your Uncle Joe who handles bad check defense may not be the guy you want to do your divorce. He or she may not be familiar with a Quadro.

9. Failure to have assets professionally appraised. If you have rent houses, oil and gas investments, etc. Get a professional valuation or you may be cheated in the divorce settlement. The spouse who handles these investments may not be honest with you on the values. Just because he or she loves the kids or was married to you for thirty years does not mean you can trust them.

10. Lack of faith in yourself and your future. Divorce is bad but it is not the end of the world! You may have some tough times but your life will go on and it may be a blessed life. You don't know what tomorrow brings. It may bring love and happiness. You must have faith in yourself so that you can take care of the kids and be successful in whatever you choose to do. Money is not everything, but if you don't have faith in God and yourself, you won't be financially successful.

Well that is my list and it is my prayer that it has helped you in some way. Be strong and be forceful. Don't get walked on!

J.R. Coleman, E.A., A.T.A.
www.exirsman.com

James Robert Coleman, E.A., A.T.A.
Enrolled Agent & Accredited Tax Advisor
Member: National Association of Enrolled Agents
Former IRS Revenue Officer, GS-11
http://www.exirsman.com

In The News:


pen paper and inkwell


cat break through


Divorce: Secrets To Coping With A Divorce Announcement

During a wedding ceremony, when people are joined together in... Read More

Two Hearts Are Now One

It is fitting that I should write this story on... Read More

Post-Divorce Alimony in Texas

This article provides a brief overview on Texas law concerning... Read More

Deciding On Spousal Support

No matter which side you are on, spousal support is... Read More

Seven Sets of Documents You Need For Your Divorce

Even if you believe your case will ultimately be agreed... Read More

Divorce--Getting Legal Help Without Paying Exorbitant Attorneys Fees

Ignorance is the most common trap in the business of... Read More

Does Your Sexless Marriage Have You Thinking About Divorce?

If you are in a sexless marriage and are unhappy... Read More

Divorce and Children: Things To Consider When Youre Staying Married Only For Your Children

All children are different and respond differently to divorce. Depending... Read More

Divorce and Uncle Sam: Top 10 Things You Should Know When Filing Your Taxes

1. What is my filing status? (Married, Single, Head of... Read More

Steps Toward Divorce

When you're faced with the possibility of divorce it's important... Read More

Divorce Roadmap: The Route Around the Legal System

Let's look at how a divorce case works so you... Read More

Why Standard Visitation Should NOT Be Standard

When a nuclear family separates, it usually separates into a... Read More

The Job of a Divorce Attorney

Marriage is a very solemn and serious chapter on any... Read More

Divorce Advice: Getting Divorce Advice From the Right Source

Getting the right type of divorce advice depends on what... Read More

Joint Bank Accounts and Divorce

Here are some useful tips on joint bank accounts and... Read More

Divorce: Coping With The Family Law Process

The EmotionsDivorce is a scary, lonely and misunderstood process for... Read More

Divorce -Is It Lawful?

The question of divorce and its lawfulness is of long... Read More

An In-Depth Look at Army Divorce Rates

Raleigh, NC-The largest divorce firm in the state, Rosen Law... Read More

Healing Dysfunctional Families

In a recent article entitled "Some Evidence On How We... Read More

Should I Get Divorced? Or Not?

No one besides you can determine whether or not a... Read More

Grieving the End of Your Marriage, as You Know it

The pain of finding out that your partner is cheating... Read More

How to Recover From Divorce

As a licensed mental health professional, I work with many... Read More

Divorce--The Five Obstacles to Agreement

This article and my articles "Overcoming Obstacles to Agreement" and... Read More

Divorce and Separation - A Child?s Perspective

It is always the children that suffer the most when... Read More

Effects of Divorce on Children

When a couple decides their marriage is over, a tremendous... Read More

The Impact of Divorce on Families

As a licensed mental health professional, I work with many... Read More

Tax & Financial Impacts of Divorce: 10 Mistakes to Avoid

Divorce is something no one hopes will happen to them... Read More

How To Protect Your Life Insurance Policy While Going Through A Divorce

Life insurance, more than most things you buy, relates to... Read More

What Are You Waiting For?

So, you've decided that you're no longer "a couple", but... Read More

How to Select a Divorce Lawyer

Selecting a divorce lawyer to handle your family law case... Read More

Divorce--Negotiating Agreement: Ten Steps

The best predictor of a good divorce outcome is the... Read More

Divorce--How the Legal System Works Against You

If there were no legal system, no lawyers and no... Read More

5 Things To Do Before You Even Think About Getting A Divorce

There are many steps to take to protect yourself in... Read More