By Mary Ellen Flynn, Esq., 301.563.6685
Emotionally, divorce is one of the most challenging things a person can go through. On top of the emotional aspects, there are, unfortunately, many other essential issues to contemplate. Fortunately, your attorney’s job is to alleviate these worries and walk you through the divorce process, including navigating financials. Below is a list of the most common financial mistakes individuals make when divorcing and the best way to avoid these mistakes:
- Ignoring and underestimating expenses.
Many individuals have a hard time handling the expenses that come with divorce. Spouses transitioning from a dual-income to single-income household often fail to account for expenses that become their sole responsibility. If seeking support from your spouse, you must prioritize charting your expenses; this will provide a better idea of how much support to seek from your spouse.
Similarly to the spouse seeking support, it is equally important to chart expenses if you are the higher-earning spouse.
The most important thing to do is acknowledge, accept, and discuss your financials with your attorney, who will have you prepare a budget. It’s also helpful to explain any financial concerns and goals to your attorney so they can ultimately frame a settlement agreement that helps you achieve these goals. Depending on your situation, your attorney may advise you to consult a financial advisor.
- Failing to secure spousal support (alimony) and child support payments
If alimony/child support is a big portion of your monthly income, it’s extremely important to ensure this support is available in the event of your spouse’s death. If there are no safeguards in place, a good chunk of your income becomes nonexistent before you’re ready to be financially independent of support.
Pursuant to a marital settlement agreement or court order, the higher-earning spouse can maintain life insurance for the benefit of the children and or for the lower-earning spouse. Additionally, you can ensure that you remain the beneficiary of any survivor benefits of your spouse’s retirement and pension plans.
If you have these concerns while your divorce is pending, discuss them with your attorney and ensure to make it a part of any global settlement agreement.
- Not considering Mediation or Collaborative Divorce.
Paying for an attorney to attend court regularly is financially strenuous; therefore, you should consider Mediation or the Collaborative Divorce Process.
Mediation allows you and your spouse to work out a settlement agreement with a mediator who serves as a bi-partisan voice. With the aid of the mediator, the spouses discuss resolving issues in the hopes of reaching an agreement. In choosing this route, each spouse may still consult an attorney while avoiding the costs of litigation.
The Collaborative Process is different from Mediation but has the same general idea of working out all issues without having to go to court. A collaborative divorce involves each spouse retaining an attorney—preferably one who is specially trained in the Collaborative Process. From there, the spouses and their respective attorneys have open and forthcoming discussions about each spouse’s goals and resolving all the issues involved in divorce while achieving those goals.
- Disregarding the impact when filing taxes
There are several tax implications to consider during a divorce. First, consider your options when filing your tax return. If you are still married by the end of the tax year, you may file jointly for that year. Filing jointly has its benefits and drawbacks. Filing jointly with your spouse may result in lower taxes for you both, however, if your ex-spouse makes most or all of the household income, you may incur a tax liability.
Discuss with your attorney or a tax professional how to maximize your tax deductions, such as determining which spouse should claim children as tax dependents and which spouse should claim as head of household.
- Failing to anticipate the tax ramifications if you continue owning a home with your ex-spouse
Tax rules can complicate decisions regarding the marital home. For instance, spouses can remain joint owners of the marital home once divorced; however, planning for its eventual sale is crucial.
If you fail to plan for the home’s eventual sale, it’s possible to incur a capital gains tax, resulting in a large financial impact. Additionally, during joint ownership, you should determine which spouse should claim the mortgage interest deduction and which spouse should claim the real estate tax deduction.
Tax consequences and strategies are necessary to address with your attorney due to their complexity. If needed, your attorney could recommend a CPA who has experience with complicated tax issues.
Overall, your attorney can help answer a lot of the financial issues that come with divorce. However, these tips mean to help you understand the importance of evaluating your current financial situation and establishing financial goals for your future.
Andalman & Flynn, P.C. serves clients throughout Maryland and the District of Columbia, offering compassionate, quality service and results-driven representation across a broad range of legal areas. With a concentration on disability benefits law and family law, the firm focuses on cases that impact the rights of everyone, and they are there for clients when responsive legal help is most critical. For more information about Andalman & Flynn, please visit our website or call 301.563.6685.