Avoid making costly divorce financial mistakes because money matters are often at the heart of divorce disputes, for better or worse. Since divorce is on the rise during the pandemic, be aware that aside from the cost of divorce, other parts of the process can end up costing you.
No Mistake About It
For starters, some assets appear as if they have equal values. But, once you start to factor in the tax impacts, the assets can look very different. For example:
A hundred dollars in cash is different from shares of GameStop valued (at the time) at $100. Holding onto that stock can lead to appreciation (or depreciation) and selling the stock can have a tax impact.
Basically, the profit made on any given assets — the difference between the cost basis (generally, what you paid) and the sale price — ends up getting taxed as either a long-term or short-term capital gain once sold, depending on whether the asset was held for under or over a year.
Even if two assets have the same value right now, the cost basis for them may be different, and one will have more or less taxes than the other. Subtract those taxes from the value if you’re really going to do an equitable division.
So if the asset in question is, say, a traditional 401(k) account, withdrawals will be taxed at ordinary income tax rates.
Florida Divorce Mistakes
I’ve written on divorce issues and divorce planning. In Florida, a divorce is called a “dissolution of marriage.” Florida is one of the many states that have abolished fault as a ground for dissolution of marriage.
The only requirement to dissolve a marriage is for one of the parties to prove that the marriage is “irretrievably broken.” Either spouse can file for the dissolution of marriage.
You must prove that a marriage exists, one party has been a Florida resident for six months immediately preceding the filing of the petition, and the marriage is irretrievably broken.
The reason for the irretrievable breakdown, however, may be considered under certain limited circumstances in the determination of alimony, equitable distribution of marital assets and debts, and the development of the parenting plan.
The divorce process can be very emotional and traumatic for couples as well as their kids. Spouses often do not know their legal rights and obligations. Court clerks and judges can answer some basic questions but cannot give legal advice.
Everybody Makes Mistakes
If you have a 401(k) or other retirement account and your soon-to-be-ex is entitled to a percentage of the distribution, be careful how you arrange the split. If you take the money out of you 401(k) and then give it to your soon to be ex, there will be a 20% tax withholding. Additionally, if the account holder is younger than age 59½, a 10% penalty for early withdrawal could apply.
Instead, you may need an a qualified domestic relations order, or QDRO. This is a separate order from the divorce agreement which gets approved by the court and sent to the plan administrator – who also must approve it.
Sometimes, divorcing couples sell the family home and divide the proceeds as dictated in their agreement. Other times, one of the spouses remains in the house. In this situation, depending on the specifics, there are a few things to watch for.
For starters, assuming your ex will no longer be a joint owner or responsible for any mortgage on the home, you would need to refinance the loan and qualify for it on your own. Otherwise the ex spouse would still be liable for the unsatisfied mortgage.
The CNBC article is here.