Financial Steps to Take Before a Divorce
Wise moves to make before things are finalized.
Before your divorce goes through, it will be wise to check up on financial matters. It will be better to assess the state of your financial life before the split rather than after. You need to know where you stand financially; beyond your salary and bank accounts. How much do you have in retirement savings? What’s your individual monthly income? Do you have other investments? Will you keep the home and assume the mortgage payments? Will you need to sell any assets? You need to know your individual financial picture.
You should document everything about your personal finances. Everything you can think of. Whether you scan it or copy it, you should have as complete a picture of your financial life as possible. Make sure to include your credit (score & debt) and insurance (life & health).
Track your credit before & after your divorce. There are three major credit reporting agencies that assign you credit ratings: Equifax, TransUnion, and Experian. Today, a good credit score is north of 690, a fair credit score is in the mid-600’s and a poor credit score is below 630. Through Credit.com, you can see two of these three credit scores for free which updates each month. If your ex-spouse attempts to add some unauthorized debt in your name, this is one way to know about it.1
Do you have your own health insurance? If so, how much do you pay for it per month? If not, you may have a challenge to secure it – hopefully, your health or employment situation allows you to get coverage without many obstacles. Apart from health coverage, other types of insurance have no doubt protected other people and important items in your household. Who owns these policies? The beneficiary designations on the policies will undoubtedly need to change.
What should you do about taxes? If you are divorcing after April, should you and your spouse file one more joint return? This calls for a chat with your tax professional. Filing jointly could save you money compared to filing single, but it also means you are jointly responsible for everything on that 1040 form.
If you remain legally married and living with each other on December 31st, the two of you must file your federal tax return for that year as a married couple – your filing status will either be married filing jointly or married filing separately. If you think you will receive a refund, you need to communicate to see how it will be divided – the IRS does not allocate refunds to divorced spouses by any kind of formula.2
If you will have primary custody of your children, the IRS expects that you will claim the exemption for dependent children on your 1040 form. If you have multiple children, it is allowable for you and your former spouse to divide the per-child exemptions as you see fit. If you paid some or all of the medical expenses for one of your children, you can deduct those expenses even if your ex-spouse has primary custody of that child.2 These decisions need to be made prior to the divorce and specified in the divorce decree.
Most importantly, assess what your financial potential will be after the divorce. An “equal” settlement is not always an equitable one, as one spouse may be left with much greater potential to build and retain wealth than the other. That is the most important long-term issue to address, and it should be addressed well before a divorce is finalized.
Barbara Bell may be reached at 704-820-8393 or [email protected]