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Financial Issues of Divorce

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Dividing Property and Debt, Child Support, Alimony, Taxes, Retirement Funds

Dividing Property

Your marriage is coming to an end. Who gets the antique mirror your mother-in-law gave you last Christmas? Who gets the stocks in GE? The furniture? Car? How do you divvy up the accumulated belongings of years of marriage?

Many people come to an amicable agreement about the division of property, but if there's disagreement about one or more items, there are a number of fair methods of deciding who gets what. One of the most common is bartering, where one spouse takes certain items in exchange for others. For example, the wife may take the car and furniture and the husband may take the truck and tools.

Another method is to sell the marital property and divide the proceeds. Mediators or arbitrators may also be used. For a list of 10 methods of dividing property, see "Ten Ways to Divide Property Without a Fight."

Be sure to familiarize yourself with the laws that govern the division of property in your state. You can find information for your state at DivorceNet.com. For detailed advice on how to save money in legal fees by dividing the property yourself, see Divorce Central's FAQs on Financial Issues of Divorce, which includes, among other things, an excellent discussion of the best way to deal with the family home in a divorce.

Dividing Debts

Often even more difficult than dividing the property in a divorce is deciding who will be responsible for the debt the couple has incurred. In order to do this, you'll need to know how much you owe. Even if you trust your spouse 100%, do yourself a favor and order your joint credit report from each of the three credit reporting agencies. People have been known to run up debt without their spouse's knowledge, especially when they're contemplating leaving the marriage. Overlooking this step could cost you years in debt repayments.

Next, go through the credit reports and identify which debt is shared and which is in your spouse's name only. At this point it's important to stop the debt from growing any larger while you're in the process of getting divorced. The best way to do this is to cancel most of your credit cards, leaving perhaps one to use for emergencies.

Once you've identified your debts and taken steps to ensure they don't increase, it's time to decide who will be responsible for what debt. There are several ways to do this, including:

  • If possible, pay off the debts now. If you have savings or assets you can sell, this is the cleanest method. You don't have to worry that your spouse will leave you responsible for his/her portion of the debt, and you can start your new life debt-free.
  • Agree to take responsibility for the debts in exchange for receiving more assets from the division of your property.
  • Agree to let your spouse take responsibility for the debts in exchange for receiving more assets from the division of property.
  • Agree to share responsibility for the debts equally. This leaves you the most vulnerable, because your spouse could stick you with the total debt. Legally, you are responsible if your ex-spouse doesn't pay up, even if s/he signs an agreement taking responsibility for the debt.

Tax Issues in Divorce

People sometimes get caught up in the obvious issues of divorce such as the division of property and debt, who will have custody of the kids, etc., and don't think through the tax implications of divorce, an oversight that can cost you thousands of dollars and more. Tax issues include:

  • Who will get the tax exemption for dependents?
  • Who will be able to claim Head of Household status?
  • Which attorney fees are tax deductible?
  • How can you be sure "maintenance" payments will be tax deductible?
  • How can you avoid the mistake of having child support be non-deductible?

See 10 Divorce Tax Tips and Divorce and Tax Issues for a complete discussion of these issues.

Retirement Plan Issues in Divorce

If your spouse has retirement savings, you are probably entitled, by law, to half. This money can be used for your own retirement or for a down payment on a house, relocation expenses, or other current expenses. To avoid the 10% penalty on early withdrawal, be sure to follow IRS regulations, as covered in Divorce and Retirement Assets: Getting the Money Without Getting the 10% IRS Tax Penalty.

A Word About Dishonest Spouses

Divorce can bring out the worst in some people, and you need to be aware that even the most honest of people may try to cheat when it comes to settling up financially in a divorce, by under-reporting income, asking an employer to delay a large bonus or salary increase, etc. Most vulnerable are those whose spouse owns a closely-held business. See Forensic Accounting in Divorce for an overview of the ways in which a spouse may attempt to hide assets and income.

Other Resources

Excellent IRS publications on tax issues related to divorce:

Publication 503: Child and Dependent Care Expenses
Publication 504: Divorced or Separated Individuals
Publication 555: Community Property

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