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

---

Better Links Directory

Divorce and the Stock Market

The most recent statistics show that about 50% of all... Read More

Alienation of Affection - Interference with marriage can cost big bucks in North Carolina

Non-lawyers are often surprised to learn that a spouse can... Read More

Advantages to Doing Your Own Divorce

There are many advantages to doing your own divorce. Three... Read More

Reasons You Arent Starting the Decision Making Process About Whether To Get a Divorce Or...

Stay MarriedAlong with any tough decision comes reluctance, especially when... Read More

Surviving Life After Divorce

After divorce, the most important thing you can do is... Read More

How Thinking About An Uncontested Divorce Figures Into Your Decision About Divorce

An uncontested divorce is the most common type of divorce.... Read More

Child Support: 5 Key Things Every Parent Should Know

There is no magic solution to getting issues surrounding child... Read More

Commitment

Being marriage means being fully committed to your husband as... Read More

Divorce Roadmap: The Route Around the Legal System

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

Divorce: How To Survive A Divorce And Move On With Your Life

One out of every two marriages in America is failing.American... Read More

How to Select a Divorce Lawyer

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

Healing Dysfunctional Families

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

Steps Toward Divorce

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

How Can Collaborative Law Be Beneficial In Your Texas Divorce?

Collaborative law is based on the realization that the commitment... Read More

Divorce: Coping With The Family Law Process

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

Divorce Advice: Getting Divorce Advice From the Right Source

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

Tax & Financial Impacts of Divorce: 10 Mistakes to Avoid

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

Divorce Online Sevice - Why Should We Lose Money And Time Applying For Divorce?

Attempts to use the worldwide Web as an effective means... Read More

Divorce

The most recent statistics show that about 50% of all... Read More

Does Your Sexless Marriage Have You Thinking About Divorce?

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

Hidden Divorce Costs

Divorce has become part of life in the 21st century.... 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

Is Your Marriage Problem Severe Enough To Warrant Getting A Divorce?

Having a marriage problem can be agonizing especially if you're... Read More

10 Ways to Keep Divorce Lawyers From Ruining Your Life

Everyone has heard the story (from friends, co-workers, and family... Read More

Post-Divorce Alimony in Texas

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