Divorce affects every aspect of your
life. A large part of your life that changes is your financial situation. A
reality of divorce is that your lifestyle is bound to change, and not for the
better. The sooner you can accept this reality, the better off you will be. It
may not be permanent, but chances are it will, especially if there is a large
disparity between salaries and earning potential. With this in mind, you will
need to carefully think through all your financial decisions. If possible it is
best not to make any major purchases, such as a new car, or another residence. Before making any kind of large purchase consult your attorney.
It may have a direct bearing on your case. During a divorce is not the time to
act impulsively.
You can also save a lot of money by doing the following:
Negotiate fairly.
Hard
as it may be, you should try to treat the financial part of your divorce as if
you were running a business. Don't let your emotions interfere with your
financial decisions. You might love your home, but the reality may be that you
simply cannot afford it any longer. Another costly mistake people make is to
seek revenge through the finances. No matter what you may think, you are not
entitled to everything. There are guidelines that are followed for splitting
assets and determining child support and alimony. If you take the stance of
"I'm going to wipe him/her out" you will probably end up wiping
yourself out as well. Everybody loses in that situation.
It is in the best interest of
both parties involved to cooperate fully when it comes to financial matters. If
you can't agree on financial (or any other) issues, you will end up in court
with a judge making the decisions. Judges don't care about the emotional issues
of your divorce when making financial decisions. Generally they don't concern
themselves with issues such as tax consequences either. That reason alone
should be sufficient motivation to negotiate as much as you of your settlement
as you can.
SOCIAL SECURITY
Benefits For
A Divorced Spouse
A
divorced spouse can get benefits on a former husband's or wife's Social
Security record if the marriage lasted at least 10 years. The divorced spouse
must be 62 or older and unmarried. If the spouse has been divorced at least two
years, he or she can get benefits, even if the worker is not retired. However,
the worker must have enough credits to qualify for benefits and be age 62 or
older. The amount of benefits a divorced spouse gets has no effect on the
amount of benefits a current spouse can get.
Survivor Benefits
Unmarried children under
the age of 18, (up to age 19 if they are attending elementary or secondary
school full time) are entitled to survivor benefits if your former spouse
passes away. The child would also be entitled to survivor benefits if he or she
was disabled before age 22 and remained disabled. Under certain circumstances,
benefits can also be paid to stepchildren, grandchildren, adopted children or
dependent parents age 62 or older.
Benefits
for Surviving Divorced Spouses
If your former spouse
passes away, you can get benefits under the same circumstances that your former
spouse's widow or widower would get if your marriage lasted 10 years or more. You do not have to meet the
length-of-marriage rule if you are caring for your child who is under 16 or
disabled and who is also getting benefits on your Social Security record. The
child must be your former spouse's natural or legally adopted child.
Benefits paid to a surviving
divorced spouse who is age 60 or older (50-60 if disabled) will not affect the
benefit rates for other survivors getting benefits.
WILLS
No Will
Laws
vary from state to state on who is entitled to an inheritance, and in what
percentage of the estate they are entitled to, when there is no will. A general
rule of thumb is that the surviving spouse will inherit the entire estate if
there are no surviving children. If there are surviving children, then the
children are usually entitled to two thirds, with the surviving spouse
inheriting the remaining one third. If there is no spouse then the children
would be entitled to the entire estate. Remember that spouse indicates current
spouse not ex-spouse.
CREDIT
Of
all the assets that you have the one you are least likely to protect is your
credit rating. It is very easy to let your credit rating deteriorate during a
divorce. You might not think maintaining or establishing a good credit rating
in your name is very important, you will one day find out exactly how important
it is to your financial well being. Under certain circumstances it is sometimes
unavoidable that credit rating is effected, but you
can take steps to maintain a good credit rating.
1.
Get a copy of your credit report. Depending on the
state that you live in you may be entitled to a free copy every year. Get a
copy from each of the major credit bureaus as the information may vary from
credit bureau to credit bureau. Go over every detail of the report. If there
are items or sections of the report you don't understand then call the credit
bureau that you received the report from and ask them to explain it to you.
2.
If you believe that any of the information on the
report is incorrect, notify the credit bureau. They will you send you a form
that you must fill out. They will then verify your information with the creditor
and send you an update. If you disagree with the outcome you are entitled to
add your own statement to the credit report.
3.
Make sure that your bills are paid on time. If you
think you will hurt your spouse by not paying your bills on time during you are
absolutely right. The only problem is you will also be hurting yourself. If the
account is your name only then you are only hurting yourself. Remember, when
you opened your joint credit account you and your spouse became contractually
obligated to pay the debt. A divorce decree or property settlement agreement
does not change that liability, even if it states that one person is
responsible for the debt. If your spouse does not pay the debt the creditor can
and most likely will seek payment from you. Your actions of not paying or
paying late will remain on your credit report for the next seven years.
4.
You can place a fraud alert on your credit report. If
you are willing to give up the opportunity to get instant credit you can notify
both Trans Union and Experian credit bureaus to add a
statement to your credit report requesting creditors not approve new accounts
without calling you first. This will protect you from people opening credit
accounts in your name. Unfortunately, Equifax does allow you to add this
statement to your credit report unless you are already the victim of fraud.
A credit report is information
compiled about your credit payment history. All accounts in your name or any
account opened jointly by you and your spouse after June 1, 1977 will appear in
the report. If your spouse has an individual credit account and has authorized
you to use it, that account will also appear in the report.
Banks, retail stores, credit
card companies and other lenders report to credit agencies. Public record
information such as tax liens, bankruptcies or judgments against you also appear on your credit report.
Federal law regulates who may
access your credit report and the reasons for accessing it.
The three major credit
reporting bureaus are:
Equifax
PO Box 740241
Atlanta, GA 30374-0241
800-685-1111 To order your credit report
800-525-6285 To report fraud
Experian (formerly TRW)
PO Box 1017
Allen, TX 75013
888-397-3742 To order your
credit report
800-301-7195 To report fraud
Trans Union
PO Box 390
Springfield, PA 19064
800-916-8800 To order your
credit report
800-680-7289 To report fraud
BANKRUPTCY
Consult
a bankruptcy attorney as to the implications of filing for bankruptcy. The
implications can last for 10 years and may not be in your best interest
depending upon your circumstances and the results you were looking for.
Bankruptcy is not always the easy way out of debt or your best solution.
Several types of debts are not
dischargeable in bankruptcy court such alimony, child support and student
loans. In addition if you and your spouse are jointly named as a debtor only
you will discharged from the responsibility of
paying the creditor. But, if your divorce settlement states that you are
responsible for any part of that debt, then your spouse can collect from you
the portion that you are responsible for if the debt is paid.
There are primarily 2 types of
personal bankruptcy, Chapter 7 and Chapter 13.
Chapter 7 discharges most of your debts. In
some cases you might have to surrender some of your property. If you own a home
you might not have to surrender it if the equityof
the home (current value of home minus mortgage balances) is under a certain
amount. Some states also allow you to keep clothing, household furnishings,
property and other basic items.
Chapter 13 allows you to keep all your
property. You develop a plan that allows to repay a
portion of your debts through monthly installments based upon your earnings.
The plan would be in effect until the debts are paid in full or until the end
of a three to five year period.
NOTE - There is currently legislation
before Congress in regards to bankruptcy laws. Please consult a Bankruptcy
Attorney as to the status of the proposed law changes and the impact it could
have on your case.
RETIREMENT
If you and/or your spouse have a pension there is a good chance
it/they will be subject to some form of equitable distribution.
Few areas of equitable
distribution seems to strike a chord more than splitting a pension, especially
if one party has worked outside the home and the other party has not.
More than likely, if you
are young, your retirement funds are not something you give much thought to.
Going through a divorce will change that. As with every other decision you make
concerning your divorce, what you decide about the division of the pension will
affect your lifestyle. The only difference is that you won't feel the effects
until it's time to retire. It's important to keep in mind that what was once
going to support one household in retirement must now support two. This is a
good opportunity to see exactly what you have and what you will need for your
retirement and start planning for your own individual retirement.
Pension plans are complex
to say the least. Each plan is different. You and your spouse may be able come
to an agreement on how to split it, but to obtain the valuation will require an
expert. Depending on the type of plan that you have, the "real" value
may differ from the value the court assigns to it.
The value of the pension
will also vary depending upon your individual state's laws regarding when the
pension becomes qualified for equitable distribution and as of what date the
pension is to be valued at. If you had a substantial pension prior to your
marriage, that portion of it may be considered a pre marital asset. In addition
the date to be used to determine the final value of the pension may be the date
the divorce complaint was filed. Your attorney would be able to answer these
questions for you.
Pension plans are an asset
and can be used as a bargaining chip when negotiating your final settlement
agreement. But beware, trading off the pension for an
asset may not be in your best interest. Remember the real value of the pension
and the values assigned by the court are not always equal. Consult a
professional before making any decision to give up your share of the pension.
The QDRO Quandary
A QDRO
(pronounced 'quad dro' and stands for Qualified
Domestic Relations Order) is a separate court order awarding a share of the
pension to each party in the divorce.
Immediately upon filing for
your divorce you must take action on the division of any pension that qualifies
for equitable distribution. As the beneficiary of the plan you should contact
the plan's administrator and request of the summary plan description. Once you
obtain this description you can determine your rights under the plan. Each plan
is different so you must find out the specific requirements of the pension in
order to acquire your portion. It is your attorney's responsibility to prepare
the QDRO. If the QDRO is not prepared according to the plans specifications it
will not be honored. This will cost you additional money in attorney fees as
well as putting your distribution at risk.
It is very important that
all pension issues be settled before the divorce is final. Even if the pension
is included in your settlement agreement and you don't get the QDRO when the
divorce is finalized you will have to go back to court to obtain it. This may
be putting your share of the pension at risk. In a recent court decision
(Hopkins v. AT&T Global Information Solutions Co. No. 96-1363, US Court of
Appeals, 4th Circuit, January 24, 1997) if the QDRO is not prepared and
submitted until after the divorce, and your former spouse remarries and retires
before the submission, the QDRO may not be enforceable. His or her current s The information contained on this
page is for informational purposes only. Before acting upon or making any
decisions based upon the information contained within this page, consult a tax
professional experienced in matrimonial issues first.
DIVORCE AND TAXES
FILING STATUS
How are you going to file your taxes. Determine the best way financially to do this.
Normally filing a Married Joint Return will result in the lowest taxes. Do not
look at a joint return as any kind of "attachment" to your spouse.
This is strictly a financial situation. You would qualify for the Married
Filing Jointly status if you are not yet divorced. You do not qaulify for this status in the tax year you were divorced.
EXEMPTIONS
You may claim a child that does not
live with you only if it is stated in your divorce or separation agreement or
if mutually agreed upon. This would not apply if you and your spouse are filing
a Married Joint Return (see above).
DEDUCTIONS
Under certain circumstances, the
amount of your legal and accounting fees paid which can be attributed to
maintaining or preserving income (not child support) may be tax deductible.
ALIMONY
If
you either pay or receive alimony/maintenance there are tax ramifications.
Alimony/maintenance (not child support) is taxable to the recipient and
deductible for the payer. Occasionally a dispute will arise as to how much
alimony was paid/received. Sometime the IRS will
question the alimony amounts. For that reason it is very important to keep good
records. If you fail to keep adequate records you may lose the alimony tax
deduction.
If you pay alimony you should
keep the following records for at least three years:
1.
Original checks. Be sure to show on each check the
month the payment represents.
2.
A list that shows the date, check number, amount and
address where payment was sent.
3.
If you give cash obtain and retain a receipt signed by
both the payer and the recipient.
If
you receive alimony you should keep the following for at least three years:
1.
A photocopy of the check or money order received.
2.
A list that shows the date, check number, amount of
payment, bank account the funds are drawn on, account number against which the
check is drawn on.
3.
A copy signed receipt with signatures of both payer
and recipient for any cash payment received.
CHILD SUPPORT
Is not taxable nor is it deductible.
EARNED INCOME CREDIT
If your adjusted gross income is less
than $28,281 with one qualifying child or less than $32,121 with more than one
qualifying child or $10,710 if you do not have a qualifying child, you may be
eligible for the earned income credit. See IRS publications for additional
qualifications.
CHILD CARE CREDIT
You may be able to take this credit
if you paid someone to care for your child who is under age 13.
CHILD TAX CREDIT
This
credit is in addition to the child care credit and the earned income credit.
With this credit you can get a refund even if you do not owe any tax. The
credit can be up to $600 per child (it was $400 for the tax year 2000). To
qualify for the crdit you must have at least one
qualifying child. According to the IRS a qualifying child for the purposes of
the child tax credit is a child who:
1.
is claimed as your dependent and
2.
was under age 17 at the end of the tax year and
3.
is your son, daughter, adopted child, stepchild
grandchild or foster child and
4.
is a US citizen or
resident alien.
INCOME TAX EVASION BY SPOUSE
If
your spouse knowingly cheated on your joint return to evade taxes, you might not
be held responsible. Effective July 22, 1998 a new tax rule went into effect
whereby if you are divorced, legally seperated or
have been living apart from your spouse for at least 12 months, and you were
unaware that your spouse lied on your joint tax return, you can file papers
that would compute your tax liability separately. If you have been audited and
you believe this rule applies to you contact a tax specialist who has
experience with this type of matter
pouse would become vested for the surviving spouse benefit.