Five Common Financial Mistakes in Divorce and How to Avoid Them

Posted on October 23, 2007 by J. Benjamin Stevens

USA Today recently published the following five common mistakes couples make when they separate their finances and tips on how to avoid them:

1.  Hanging onto the house at all costs.

Many couples scrambling to obtain a divorce settlement wish to keep the house at any cost. However, financial experts say that more attention should be given to who can afford to maintain the property, pay the mortgage, and manage the taxes. While it is possible to ask for spousal support to help make the mortgage payments, unexpected maintenance costs may pop up, and make home ownership more of a liability than a luxury.

2.  Failing to make a clean financial break.

Clean separation of assets and debts is another difficult task, but one that Howard Dvorkin, the founder of Consolidated Credit Counseling Services says is absolutely necessary, or the consequences can be devastating. Although the task may seem insurmountable, “the alternative is much worse,” says Dvorkin. “Having a spouse drive up your debt when you’re not married anymore” can seriously affect one’s credit score.

3.  Counting on your ex to honor financial commitments.

Depending on your former spouse to comply with financial arrangements is also a huge mistake, according to this article. Although both parties in a divorce are beholden to a court-ordered divorce agreement, creditors do not fall under that arrangement. If your ex spouse is supposed to pay the mortgage, but doesn’t, “the lender is going to sue both of you,” remarks Melissa Avery, an Indianapolis family law attorney.  If your ex fails to pay the mortgage, you may be hurt when applying for future loans.

4.  Forgetting to change your will and beneficiary forms.

Wills and trusts can also be seriously impacted by divorce proceedings. If divorced spouses wait unnecessarily long to change a beneficiary on a will, for example, the money may go to the wrong person — your new spouse may get nothing, while your ex spouse inherits the amount provided for in your will.

5.  Overlooking taxes.

Finally, NEVER forget which amount of money in your divorce settlement is alimony, and which amount is child support. Whereas child support payments are not taxable to the recipient, alimony payments are. Furthermore, there are limits to how long a person can receive such payments — child support payments can no longer be received once the child turns 18 or is done with college, while spousal support generally ends once the recipient remarries.

Source:  "Breaking Up Is Hard To Do Financially" by Kathy Chu, published in USA Today.  Thanks also to the California Family Law Blog and the Georgia Family Law Blog for their posts on this subject.

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Tax Mistakes to Avoid During Divorce

Posted on July 19, 2007 by J. Benjamin Stevens

Reasons to consider filing your taxes separately from your spouse:

  • You don't trust your ex. When you sign a joint return, you can be equally liable for all taxes, penalties and interest owed. If your ex-spouse doesn't pay, the IRS can come after you for the whole amount.  However, you might be able to claim innocent spouse relief if your spouse greatly understated his or her income and you had no way of knowing that when you signed the return.
  • Your ex owes back taxes, back child support from a former marriage or has defaulted on federal student loans. If you file jointly under such circumstances, any refund you may be entitled to may be put toward your ex-spouse's debts.
  • One of you has a low income but very high deductions. In this case, it may make more financial sense to file separately.
If you file separately, you forfeit the following credits and deductions:
  • Earned income tax credit (EITC)
  • Child and dependent care credit
  • Adoption expenses credit
  • Hope and lifetime education credits
  • Qualified tuition deduction
  • Student loan interest deduction
  • Ability to deduce some of your Social Security benefits
The following factors determine which parent gets to claim the children as dependents on his/her tax returns:
  • Unless there is an agreement or order stating otherwise, the custodial parent – that is, the parent with whom the child lives -- normally takes the dependency exemption when you file separately.
  • The custodial parent can sign a formal release enabling the non-custodial parent to claim the child.  This often makes sense if the noncustodial parent earned the most income during the year.
  • The dependency exemption cannot be divided, even if the children lived with each parent one-half of the year. Only one parent can claim the exemption for each child.
  • Unlike with alimony payments, child support payments are not deductible to the parent who makes them, nor is it treated as taxable income of the parent who receives them.
Even if you decide to file separately from your spouse, you must still cooperate with him/her for these tax issues, for the following reasons:
  • You must put your spouse's name and Social Security number on your return, so the IRS can match up both your returns to see if there are any discrepancies.
  • You either both have to itemize or you both have to take the standard deduction.
  • If you do itemize, coordinate who takes which deductions that you normally would have taken together as a couple.
  • If you file jointly, decide before filing your return just how you'll divvy up the refund or the tax bill, and consider put any such agreement in writing or make it part of a court order.
Source:  "Recently Split? Avoid Costly Tax Mistakes" by Jeanne Sahadi, published at CNNMoney.com.

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