Expensive Divorce Mistakes

Expensive Divorce Mistakes

If you’re getting a divorce, it pays to stay off social media—for many reasons. But oversharing isn’t the only mistake people make when their marriages are tanking. Here are three more that can cost you money.

Not assembling all the paperwork. Important documents and information tend to disappear, or their access is blocked, as divorce proceedings drag on. While you can, gather paperwork showing: (1) account statements for all financial and retirement accounts for at least three years, (2) tax returns for at least three years, (3) Social Security statements showing your spouse’s earnings record and expected future benefits, and (4) amounts paid for major assets, such as your house and any improvements. These documents are critical to negotiating a favorable divorce settlement and will also help you with future retirement and tax planning. For example, if you were married for at least ten years, you may be able to claim Social Security spousal or survivor benefits based on your ex-spouse’s earnings record.

Ignoring tax issues. Investments, property, retirement accounts, and other assets worth a certain amount now may be subject to different tax treatments later that can significantly impact their long-term value. A Roth IRA, for example, is worth more than a traditional IRA with the same balance since Roth IRA withdrawals aren’t taxed in retirement. A married couple can exclude up to $500,000 of home sale profit from their taxable income, but a single person can exclude only $250,000. Also known as alimony, spousal support used to be taxable to the person receiving it and tax-deductible for the person paying. That’s no longer true for divorces finalized after 2018. The point here is that the future, after-tax value of assets should be considered during divorce settlement negotiations.

Leaving joint credit accounts open. Creditors aren’t bound by divorce settlement agreements. Even if one spouse agrees to take responsibility for a joint debt, the other spouse can still be held liable for it if his or her name remains on the account. Divorcing couples should close joint accounts and transfer debts to new accounts or loans in the responsible spouse’s name only.