Divorce is a process that can be exhaustive emotionally, physically, and mentally for those who go through it. As amicable as one would hope and like for things to go there many times may be a lot of emotion, consideration and disagreement that can take place during the process. I say this not only from what I have witnessed in the clients that I’ve helped over the years but as someone who has gone through the trials and tribulations of the divorce process firsthand myself.
“It is important that we look deeper in these efforts (or consider working with someone regarding the financial aspect) to ensure that we aren’t on face value seeing 50/50 ‘split’ as completely fair or equitable. Remember: it’s not what you get from your settlement, it’s what you keep & where what you keep will position you for the many years to come.”
As exhausting and taxing as this can all be, it may lead us to wanting to ‘just get it done’ with the best hopes that we have evaluated what we feel is fair and that what we decide is fair today will feel that way to us years down the road. It is important that we look deeper in these efforts (or consider working with someone regarding the financial aspect) to ensure that we aren’t on face value seeing 50/50 ‘split’ as completely fair or equitable. Remember: it’s not what you get from your settlement, it’s what you keep & where what you keep will position you for the many years to come. So, with that in mind, let’s look at what you should remember to consider in your settlement negotiations:
Tax Filing Considerations
This is where the age-old adages of “it’s not what you make it’s what you keep” or in our case “It’s not what you get it’s what you keep” come into play. So where do taxes come into the picture when you are making considerations during the negotiation as well as in the plans for your future?
Tax filing status change from “Married” to “Single”
The transition in your filing status may make for some surprises depending on your income level and/or your plans for the assets you receive as part of the settlement. Recognize where you may reasonably land as a result of the decisions you are navigating to best understand how everything from your take home pay to the longevity of account balances after taxes may be impacted.
Children cannot be claimed at the same time (in the same tax year) as dependents on two separate returns. Recognize the difference this may make on your tax liabilities year to year if there is a “year on/year off” approach to claiming dependent children and being able to file under head of household. Careful consideration should be placed in the efforts as to how this impacts the overall equitable nature of the settlement in question.
Tax impacts of gaining (or giving up) assets
Consider the gain (or loss) of any home write-offs that still exist for you as a taxpayer if you have the mortgage interest and/or property tax to write off each year. In retrospect, also consider the loss of such write offs as well as loss of potential appreciation of home value in your future net worth when considering giving up or holding onto the house. Most importantly, realistically assess the ability to maintain and financially support the property should you agree to taking the house. As a final consideration, know your state and federal tax considerations if selling/relocating is in the cards at a future date. As an example, my home state of NJ has an “exit tax” to consider if out of state moves are part of the greater plan.
Historically, Alimony could be written off by the spouse who paid the alimony (therefore lowering their income and tax bracket) while the receiving spouse would have to count it as income (resulting in or keeping them at a higher income bracket). Most recently the tax code has changed to remove the tax break from the payer (they no longer can write off the payments) and now benefits the receiving spouse (it no longer needs to be claimed as income).
Don’t forget the future
Understandably, it is easy to get swept away in the endless decisions, considerations, and proposals back and forth. However, do not forget to take the longer view because what you decide today has impacts for many years to come. Potentially, these impacts can be life-long in the financial sense of how your retirement and/or ability to retire is left following the divorce.
Have a plan & know what to do
It can feel great to have things finished; but don’t rush to spend or make any sudden moves until you fully understand the consequences. Far too often I’ve seen retirement money used to celebrate or ‘treat’ oneself at the conclusion of a divorce only to be treated with an unexpected bill from the IRS. Also, understand that this is not the best time to DIY either the transfer of such funds from one person to another or the setting up of these assets for your future. It is well worth your time and investment to sit with a professional sooner rather than later.
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