As many of you know, one of my specialties is financial planning for divorced women. Yes, I’ve been there myself and even in the most amicable of cases it’s not easy. There are some “gotchas” and even a few changes brought to us by the tax law changes which took effect in 2018.
So here’s a quick summary of some basic concepts if you’re going through a divorce or just getting started:
- Alimony payments: this is a huge tax change; it’s great news for the payee and bad news for the payor. If your divorce becomes final after Dec. 31, 2018, the person paying alimony can no longer deduct those payments from their federal taxes. The person receiving alimony also will not include those payments in their federal taxable income. This is one of the changes enacted as part of the recent Tax Cuts and Jobs Act, and it does NOT expire in 2025 like many of the other changes. Child support payments remain as they were: the payments are not income-tax deductible and no income tax is paid by the recipient.
- Child support: in Washington, California, and Oregon, both parents are responsible for supporting the children. Support payments are calculated based on formulae that vary by state. The person who is paying support can pay more than the calculated amount, but they cannot pay less. The payment can be adjusted over time as circumstances change, but the payor must provide a good reason for unemployment or under-employment in order to have the payments reduced.
- Community property: Washington and California are both community property states. This means that the income and property built up by either spouse during the marriage is owned equally by both of them. Community property must be split equitably between the spouses in a divorce.
- Separate property: as you might have guessed, separate property belongs to only one spouse and is kept by that spouse after a divorce. Each state has slightly different rules about what qualifies as separate property, but in general if you owned something before the marriage or received it as a gift during the marriage (not a joint gift to you and your spouse) it is still yours after the divorce in a community property state. In addition, if you received an inheritance before OR during your marriage it remains yours after a divorce. There are specific rules around how to maintain an asset as separate property, and you should talk to your attorney and financial advisor to make sure you keep those assets legally separate in case of divorce.
- Social Security: generally speaking, an ex-spouse can receive up to half of their ex’s Social Security payment if that amount is greater than what they would receive based on their own work record. There are a few conditions: you have to wait until your full Social Security retirement age to get half of your ex’s payment, the marriage must have lasted 10 years or longer, you (the recipient) are not remarried, and your ex is 62 or older.
That’s all great information…but what if you’re not divorced or divorcing? Here are a few tips that make sense even when you’re just starting to consider divorce as an option:
- Talk to an attorney. This is critical! Don’t try to go it alone, even if you’re just in the consideration stage. You will want to thoroughly understand the rules in your state so you don’t make mistakes which could affect your case, if it does come to that.
- Build some savings of your own. Even if you aren’t working, you need to have access to money that is yours, even if you just set aside a little extra each month in your own (not joint) account.
- Make sure you know exactly how much you and your spouse make. If one of you is earning a lot of cash or is self-employed, keep track of that income! It will be important in determining support payments.
- Know where your documents are. Maintain a list of login information so that you can access investment and bank statements, tax returns, life insurance information, wills, Social Security statements, mortgage statements, and so forth. If you decide to move forward with the divorce, make sure you have copies of all these documents in case the logins change. You both need to know where your money is!
- Assess your spending. This is a good tip for anyone at any time. Keep a spreadsheet or use one of the online tools like Mint or You Need a Budget. This will help determine how much support may be needed.
- Make a list of your property, joint and separate. Make sure you have a list of the most valuable items you own, and maybe even take some pictures for valuation. This is useful if you need to split up the assets.
- Make sure you have a good credit score. Build your own credit by making sure your name is on at least some of the bills and credit cards. Check your report at least once a year; Equifax, Experian, and TransUnion are required to give you one free copy of your credit report every 12 months. You won’t be able to rent an apartment or get your own credit card without a solid credit history. Potential employers even look at credit scores now!