Beyond the vows: What happens after divorce
J.P. Morgan Wealth Management
- When a couple gets a divorce, their assets and debts are typically divided. While these things are sometimes divided up evenly, each state has its own approach.
- The costs of getting a divorce include the fees paid for a divorce lawyer, and the more layered your situation is (if you have children and joint ownership of property, for example), the more expensive it will typically be.
- Don’t forget to consider potential tax issues after your divorce. Generally, for divorce and separation agreements entered into on or prior to December 31, 2018, income from alimony is taxable and the payments are deductible by the payer, for example, while money for child support is neither deductible nor taxable.
- Generally for divorce and separation agreements entered into after December 31, 2018, alimony payments thereunder are neither deductible nor included in gross income.
While most people know that divorce is a difficult process, not everyone knows how financial details are handled between a divorced couple. Everyone’s situation is different, so you should speak to an attorney who specializes in divorce. However, there are some financial considerations that everyone should be aware of when going through a divorce.
Dividing up assets and debt after divorce
Assets are things like cash, checking accounts, investment accounts, property or personal property, like jewelry, cars, art, china, etc. If you go through a divorce using the court system, the court divides up the couple’s assets and debt. While these things can sometimes be divided up evenly, each state has its own approach.
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For example, in the state of New York, assets and debt are generally divided up equitably. Whoever is helping the couple divide their assets – be it a judge, lawyer, mediator or the couple themselves – will consider each individual’s income, the age and health of each spouse, how the tax consequences would affect each spouse and many other factors. This all comes into consideration when the judge decides how the assets and debt will be split up. Be sure to review how your state handles this.
Legal fees and divorce
How much your legal fees cost will largely depend on the way your divorce case unfolds. If neither spouse hires an attorney and the terms of the divorce are uncontested (meaning each spouse agrees to all the terms of the divorce), you can expect to pay about $300, though this varies by state. However, not all divorces run that smoothly.
Most people going through divorce hire an attorney, and this is where the more costly fees tend to arise. In this situation, the divorce process can be more expensive, and you can expect to pay about $11,300, though this number can vary quite a bit depending on how complex your divorce situation is (for instance, whether there are children, property or retirement accounts at play).
This number can also change depending on whether your case goes to trial. Many divorce cases are settled without going to trial, but if they do, you can expect to pay even more.
Alimony
Alimony is money that the court orders one spouse to pay another after the divorce. Unlike child support, which is designed to help the children in a divorce, alimony is designed to help the spouse.
Alimony is often awarded when one spouse makes significantly more money than the other, or when one spouse makes no money at all. A spouse who makes significantly less money than another in a marriage may sue for alimony if the divorce significantly worsens their quality of life. Traditionally, alimony has been awarded to women who didn’t work but maintained the couple’s family property and children.
Alimony is calculated differently in each state, so be sure to review how your state calculates alimony payments.
Tax issues after divorce
There are certain tax considerations you should keep in mind if you’ve gone through a divorce. According to the IRS:
- Child support payments are not deductible if you’re paying them and not taxable if you’re receiving them.
- Generally, for divorce and separation agreements entered into on or prior to December 31, 2018, alimony received is taxable and alimony paid may be deductible, but only if the alimony is qualified for federal tax purposes.
- Generally, for divorce and separation agreements entered into after December 31, 2018, alimony payments are not deductible if you’re paying them and not taxable if you’re receiving them.
You should consult your tax and/or legal professionals for your unique situation.
Retirement accounts and Social Security benefits
Retirement assets may be subject to division or assignment during divorce. For retirement plans, including 401(k)s and 403(b)s, this could happen through the use of a Qualified Domestic Relations Order (QDRO). A QDRO is a legal document that outlines how all or a portion of a retirement plan must be paid to another party, often a spouse, in a divorce.
Retirement accounts such as IRAs may also be subject to division or assignment; however, this may occur through a “transfer incident to divorce.” Pursuant to a divorce or separate maintenance decree and such transfer may be tax-free if properly administered and certain conditions are met. You can talk to your legal advisor about the disposition of your retirement assets to determine the best approach for your situation, including in light of the tax implications.
When it comes time to apply for Social Security benefits, you may be able to receive benefits based on your ex-spouse's work record if you meet certain criteria set by the Social Security Administration. It’s also important to remember to request a new Social Security card if your name changes after your divorce.
The bottom line
Divorce isn’t easy, and can often be a financial burden, but if you’re able to approach your divorce prepared with as much information as possible about how to manage your finances, you can lessen the stress.
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