Divorce and Finances
Divorcing? Check Your Financial Situation
Divorce may be the most difficult decision you’ve ever made. Whatever the reason for it, you know your life will change. One big change will be how you handle your finances. If you didn't play a role in managing family finances during your marriage, and you’re going through a divorce, you could be at a disadvantage. It's important for both spouses to understand their current financial situation and post-divorce needs. Address these items to stay on top of your money situation:
- Cash flow. Understand immediate cash-flow needs; if you'll need access to cash right away, look at liquid assets such as stocks, bonds, and mutual funds. If you won't need cash immediately, look at long-term assets such as retirement plan accounts.
- Insurance coverage. Check for coverage gaps and ways to cut costs. Don't find out after a disaster that coverage was cancelled for lack of payments by your spouse. Remove your former spouse from your auto policy to protect yourself from liability if he or she is involved in an accident and is sued. Consider life insurance as part of the final divorce decree to cover financial obligations. If the spouse providing alimony and child support dies, this could mean a significant loss of income.
- Retirement assets. Handle these transfers with care. The divorce decree should classify these items in a specific way. Consult a tax adviser for assistance.
- Account passwords. Make sure you have information for all financial accounts. You and your spouse eventually will have separate accounts for most items, but you still might need access to accounts such as college savings plans for children.
- Joint liabilities. Cancel jointly held credit cards, pay outstanding tax liabilities, and refinance your mortgage or auto loans, if possible. Settle all liabilities before your divorce is final by either paying them off or by transferring them to the spouse taking responsibility for the debt.
- Beneficiaries. Check your will, all insurance policies, and financial accounts such as pensions and 401(k)s to change beneficiaries.
Taxes will be another important subject to address. You and your soon-to-be ex should iron out the answers to several questions before you sit down to file your taxes:
- Filing status. Decide how you'll be filing your return this year: married filing separately, single, or head of household. Do you plan to file jointly with your soon-to-be ex-spouse or do the drawbacks and dangers outweigh the tax benefits?
- Deductions. Determine whether your divorce costs are deductible, and whether your attorney can help you prove which costs are tax deductible.
- Alimony. Figure out alimony's tax effects—on you and your spouse. Can you pass along the same amount of money with lower tax consequences?
- Children. Decide who's going to get the exemptions and credits, or whether you can split them between you and your spouse.
- Mortgage interest. Decide who's going to get the mortgage interest deduction for the year.
- Community-property state. Decide how you're going to file taxes—even if you're filing separately—without knowing your spouse's income, particularly if you live in a community-property state and you're not on good speaking terms.
- Itemize. Figure out if you have to itemize, even if you don't have deductions and your spouse does itemize—particularly if you're not sure what's going on your spouse's tax return.
If you need assistance with your financial accounts at Skyward, our member representatives will help you get all information together and make necessary updates. Gathering the required documents and getting answers to these questions may take time, so the sooner you start, the better off you will be.