A Guide to Understanding the Financial Implications of Divorce
Introduction
The Emotional and Financial Landscape of Divorce
Divorce is without a doubt a very challenging situation, both financially and emotionally. It is important to be on top of all of the financial aspects. Here is a helpful guide for reviewing your finances during this difficult time.
Overview of Emotional Challenges
The emotional challenges of divorce can be intense. Divorce is a major life change that can cause fear, anxiety, and depression. We believe that taking care of your financial situation can help ease the stress of your challenges.
Financial Stressors During Divorce
In divorce, there is a division of marital assets like property and retirement accounts, potential need for spousal support, child support payments, legal fees, the cost of maintaining two separate households, and more. All of these things could cause significant financial strain and uncertainty for those going through a divorce.
Understanding Marital vs. Separate Property
Marital vs. separate property is exactly what it sounds like. Marital property refers to assets acquired by a couple during their marriage. Separate property is any asset owned by a spouse before marriage, received as a gift or inheritance, or acquired after legal separation. It belongs solely to that individual and is not subject to division in a divorce.
Common Methods of Asset Division
One of the most common methods of asset division is community property, where assets are split equally between spouses. Equitable distribution is where assets are divided fairly, but not necessarily equally, based on factors like contributions to the marriage and individual needs; most states use equitable distribution.
Spousal Support and Alimony
Spousal support, also known as alimony, is a court-ordered financial payment made by a spouse to the other after a divorce. This is when financial support is paid by one ex-spouse to the other after the marriage has legally ended. This is to help maintain the standard of living the lower-earning spouse was used to during the marriage.
Types of Spousal Support
In Georgia, there are two types of spousal support or alimony agreements: rehabilitative and permanent. Rehabilitative alimony is awarded to help a spouse gain the education or training needed to become self-sufficient. Permanent alimony is awarded when one spouse cannot support themselves after a divorce. We see this happen after many long- term marriages.
Factors Influencing Alimony Awards
There are many factors that could influence the alimony awarded. Some of these factors consist of financial resources, the standard of living, the length of marriage, and more. Longer marriages typically result in longer alimony payments and vice versa. One spouse could have given up their career to support the other spouse’s career. The lower-earning spouse might need help to become self-supporting in this new time.
Child Support Considerations
Child support can be a very complex variable in divorce. The amount of child support is derived from income, deductions, living arrangements, and other expenses. In Georgia, child support is calculated using a worksheet created by the state legislature. There is an “income-sharing” approach, where the amount each parent pays is based on the share of total joint income.
Calculating Child Support Payments
Below is a link to a child support calculator for the state of Georgia. You input how many children you have, the percentage of time you spend with your children, monthly income and the other parent’s income. We hope you find this tool useful.
https://www.custodyxchange.com/locations/usa/georgia/child-support-calculator.php
Tax Implications of Divorce
Filing Status Changes
When you get divorced, the way you file your taxes changes. The next full year you are officially divorced you will need to do your taxes as a single person.
Impact on Tax Deductions and Credits
Divorce has an impact on tax deductions and credits. Your filing status determines filing requirements, standard deductions, and eligibility for certain credits and tax.
If you are separated but not legally separated or divorced at the end of the year, the IRS considers you married for filing purposes until you get a final decree of divorce or separate maintenance.
If you are legally separated or divorced at the end of the year, you must file as a single person that tax year, unless you’re eligible to file as head of the household or you remarry by the end of the year.
If you are legally married at the end of the year, you can choose “Married Filing Jointly,”
“Married Filing Separately,” or “Head of Household.” If you are legally divorced or separated, you usually need to adjust the amount of tax withheld from your paycheck.
Handling Joint Tax Returns
People may use the “married filing jointly” status if married and both parties agree to file a joint return. This could be for taxpayers who live separately but are not legally separated or those whose spouses died during the year and have not remarried. In the case of a married filing jointly status, both spouses must sign the income tax return. There are exceptions for people in certain situations, such as death, illness, or absences.
Long-Term Financial Planning Post-Divorce
After a divorce, you should work to create a long-term financial plan by creating a budget, establishing financial goals, and establishing an emergency fund.
Creating a New Budget
Budgeting for yourself post-divorce is one of the best things you can do. You could start by assessing and prioritizing non-negotiable needs such as housing, utilities, food, childcare, etc. Make sure you know all of the details of your divorce agreement so you can create the best budget for yourself.
Conclusion
For more information about the financial implications of divorce, and how to plan, give us a call or contact our financial planners.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax or legal issues, these matters should be discussed with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. This material has been created by Morton Vardeman & Carlson, an independent third party. Any opinions are those of the authors, are subject to change and are not necessarily those of Raymond James Financial Services.