Divorce is stressful on everyone involved, and the financial downside is usually anticipated by both parties.
If you’re planning to divorce, you’ve probably budgeted for less income, sole responsibility for some larger expenses like a car payment, and legal fees.
But, in our experience, divorcing couples are sometimes caught off-guard by some important misunderstandings or miscalculations.
Unexpected Taxes
If you received retirement plan assets as part of the marriage settlement agreement, and have taken – or plan to take – distributions, you will owe taxes on the amount received.
If you receive the family home as part of the settlement agreement, and later decide to sell, as a single taxpayer you will only be able to deduct $250,000 of any capital gain (the sales price, less the cost basis) from your taxes, rather than the $500,000 you could deduct if you were married. If you’ve owned the home for a long time and/or live in an area where home prices are above average, you may need to plan on paying some capital gains tax if and when you sell.
There are also tax considerations when dividing non-retirement investment assets. The consequences of receiving $1 million in cash are much different than receiving $1 million in, say, Intel stock. It’s critical that you know the cost basis of any investments you receive, to avoid an unexpected capital gains tax hit. Ideally, you will factor this tax charge into the settlement agreement calculation.
The True Cost of Housing
If you keep the family home as part of the settlement agreement, you’re probably anticipating the cost of property taxes and utilities. But there are also expenses that can be overlooked and can arise unexpectedly, such as a new patio or deck, a new roof, or a new furnace. Whether you keep the home or not, one or both of you will likely also have furnishing costs. In general, singles tend to spend a larger percentage of their income on housing than couples do.
Paying for Your Kids
Most states have a standard method for calculating child support. But this calculation doesn’t include costs than may arise as young children grow up and begin participating in extra-curricular activities like music or sports, or the expense associated with academic support like tutoring or enrichment programs.
Once your kids graduate high school, college may be next. In many cases, child support agreements end when a child turns 18. We are no longer surprised – but still dismayed – when we meet with a prospective client in the midst of a divorce (or shortly thereafter) and are told that the parents have decided to put off the decision about who will pay for college “until later”. We strongly encourage you to negotiate this up-front, as financing the cost of a four-year education is an almost herculean task for a single parent.
At Springwater, we’ve worked with many clients who’ve been through – or are in the midst of – a divorce. If you have questions, or would like to know how we might be able help, please call or email at any time.