Financial considerations during divorce - 02/06/14 08:05 PM
Since I have seen people asking these questions in various threads over the years, I thought one thread may be easier to refer to. This is not an all-inclusive list of what you need to consider and I will add more later. Please add any info that may be helpful to those going through the D process.
INCOME TAXES:
IRS Publication 504 - Divorced and Separate Individuals
http://www.irs.gov/pub/irs-pdf/p504.pdf
If you live in a community property state, your tax return filing for the year of divorce will be different than those who do not. Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Info is on page 23 of Pub 504.
Claiming exemption of dependent children - The custodial parent that has a child more than 50% of the time will usually be entitled to claim the dependent exemption/deduction...that is IRS law and there are few exceptions to this. If the time between parents is very close to 50/50, you will want to be careful not to lose this tax benefit if you usually have it.
If you have language in your decree that gives the other non-custodial parent this tax benefit for any given tax year, you will have to provide your ex with an executed Form 8332. If the decree states your ex is awarded this tax benefit but you claim the child anyway, your ex can sue you. The IRS will hold you and your ex to the IRS Code so do not assume you can claim the child every other year or that if you have two children that you always get to claim one. If you are the custodial parent and the BS, I would not voluntarily give this tax benefit away to a WS without some type of compensation. Bottom line is the IRS does not care about the terms of your divorce. If there is no specific language in your decree about who gets to claim a child in a given tax period, the custodial parent usually wins out. You do not want to add more stress to your life by fighting the IRS.
Form 8332
http://www.irs.gov/pub/irs-pdf/f8332.pdf
MORTGAGES
Like the IRS, your lender does not care about the terms of your divorce. If you are on the loan, you will be held liable...period! A lender is not going to remove anyone from a loan...a re-fi will have to take place. A quit claim deed between exes or spouses does nothing to remove your liability from a lender. Sever this financial tie the right way. Keeping this financial tie can become a nightmare.
CHILD SUPPORT VS ALIMONY
Child support is not taxable income. Alimony is taxable income and must be reported on your tax return. If you pay alimony, it can be deducted. You will need your ex�s SSN to report/deduct alimony. If you receive support, generally you are better off asking for higher child support and less alimony so you lessen your tax burden. If you pay support, you are generally better off paying less support and more alimony. Consider your level of income, deductions, state laws about when CS/alimony can be modified, etc.
QDRO (QUALIFIED DOMESTIC RELATIONS ORDER)
If you are awarded all or a portion of your ex�s retirement plan(s), you NEED to have a QDRO drafted to properly transfer and title the asset into your name. A divorce decree alone is not enough to protect you and you will find yourself in another legal battle if your ex dies, remarries or withdraws funds before a QDRO is processed and finalized. A QDRO can take over a year to finalize so do not delay in getting the process started.
Info from the Dept of Labor:
http://www.dol.gov/ebsa/publications/qdros.html
Top Ten QDRO Mistakes:
http://www.kegelmcburney.com/sites/default/files/Top%20Ten%20QDRO%20Mistakes.pdf
This is a random website of a QDRO preparer that provides some basic good info: http://www.stanbeutlerjd.com
See the FAQ.
Ideally the QDRO is finalized before the divorce but it is not necessary. If the divorce is finalized before the QDRO, make sure the details of the retirement benefits are addressed and specific in the decree including who bears the cost of the QDRO drafting.
INCOME TAXES:
IRS Publication 504 - Divorced and Separate Individuals
http:/
If you live in a community property state, your tax return filing for the year of divorce will be different than those who do not. Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Info is on page 23 of Pub 504.
Claiming exemption of dependent children - The custodial parent that has a child more than 50% of the time will usually be entitled to claim the dependent exemption/deduction...that is IRS law and there are few exceptions to this. If the time between parents is very close to 50/50, you will want to be careful not to lose this tax benefit if you usually have it.
If you have language in your decree that gives the other non-custodial parent this tax benefit for any given tax year, you will have to provide your ex with an executed Form 8332. If the decree states your ex is awarded this tax benefit but you claim the child anyway, your ex can sue you. The IRS will hold you and your ex to the IRS Code so do not assume you can claim the child every other year or that if you have two children that you always get to claim one. If you are the custodial parent and the BS, I would not voluntarily give this tax benefit away to a WS without some type of compensation. Bottom line is the IRS does not care about the terms of your divorce. If there is no specific language in your decree about who gets to claim a child in a given tax period, the custodial parent usually wins out. You do not want to add more stress to your life by fighting the IRS.
Form 8332
http:/
MORTGAGES
Like the IRS, your lender does not care about the terms of your divorce. If you are on the loan, you will be held liable...period! A lender is not going to remove anyone from a loan...a re-fi will have to take place. A quit claim deed between exes or spouses does nothing to remove your liability from a lender. Sever this financial tie the right way. Keeping this financial tie can become a nightmare.
CHILD SUPPORT VS ALIMONY
Child support is not taxable income. Alimony is taxable income and must be reported on your tax return. If you pay alimony, it can be deducted. You will need your ex�s SSN to report/deduct alimony. If you receive support, generally you are better off asking for higher child support and less alimony so you lessen your tax burden. If you pay support, you are generally better off paying less support and more alimony. Consider your level of income, deductions, state laws about when CS/alimony can be modified, etc.
QDRO (QUALIFIED DOMESTIC RELATIONS ORDER)
If you are awarded all or a portion of your ex�s retirement plan(s), you NEED to have a QDRO drafted to properly transfer and title the asset into your name. A divorce decree alone is not enough to protect you and you will find yourself in another legal battle if your ex dies, remarries or withdraws funds before a QDRO is processed and finalized. A QDRO can take over a year to finalize so do not delay in getting the process started.
Info from the Dept of Labor:
http:/
Top Ten QDRO Mistakes:
http:/
This is a random website of a QDRO preparer that provides some basic good info: http://www.stanbeutlerjd.com
See the FAQ.
Ideally the QDRO is finalized before the divorce but it is not necessary. If the divorce is finalized before the QDRO, make sure the details of the retirement benefits are addressed and specific in the decree including who bears the cost of the QDRO drafting.