Financial Considerations in Dealing with a Divorce

Divorce is a life event that can have a significant effect on your financial situation. Beyond the emotional stress of going through a divorce, there are many other issues to settle: what to do with the house, the cars, and sometimes even the pets. And, not the least of your concerns, there are financial issues to deal with, such as the potential impact on your taxes and investments.

Although no one solution applies to everyone, there are a few fundamentals you need to understand if you ever find yourself in this situation. Like all tax laws, the rules governing divorce are complicated, and you should always consult your attorney and tax advisor about your specific situation. But we can provide you here with a brief overview of some of the issues that can arise.

For one thing, your tax situation will change as a result of a divorce. Most married couples file a joint return, and such returns provide a variety of tax advantages. That will change, of course, but in general you are considered married for the entire year and can continue to file jointly if you have not obtained a final decree of divorce or separate maintenance* by December 31, the last day of the tax year. If you obtained a final divorce decree or separate maintenance by the end of the year, you must use a different filing status (i.e. single or head of household). You cannot claim your former spouse’s personal exemption amount, either, even if you provided all of his or her support.

When it comes to other exemptions, it’s usually the custodial parent – the parent with whom the child lived for the greater part of the year – who takes the exemption for a child. As for alimony, the payer can deduct those payments from their taxes and the recipient must report the amounts received as income. Keep in mind that not all payments made under a divorce or separation agreement are considered alimony. Your tax advisor can help you determine which payments qualify.

In addition to tax filing considerations, another area you may want to focus on is your retirement savings. If you contribute to an employer’s qualified retirement plan or to an IRA, you’re probably setting those funds aside to cover your retirement expenses. In a divorce, you need to take certain steps to see those assets are protected.

A qualified domestic relations order (QDRO, pronounced “quad row”) is an essential piece of your plan if you or your spouse has funds in an employer-sponsored retirement plan. This is a court order, judgment or decree – related to child support, alimony or property rights – that instructs a retirement plan on how to pay benefits to an ex-spouse. A QDRO establishes the right to receive a designated portion of an ex-spouse’s retirement plan account balance or benefit payments. But remember that the spouse receiving money has the responsibility for paying taxes.

These are just a few examples of the issues you may face, and while divorce is something we never really plan for, it’s important to realize that you can manage the impact on your financial situation. Enlisting the help of professionals can help you get your finances in order and get your savings and investment strategies back on track.

*A decree of separate maintenance is the document that puts the terms of a legal separation into writing.

A.G. Edwards does not render legal, accounting or tax preparation advice. You should consult your tax and legal advisors for questions regarding your specific situation.

This article was provided by A. G. Edwards & Sons, Inc., Member SIPC.