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Common Financial Mistakes Made During Divorce

Posted on in Divorce

DuPage County divorce attorneysGetting a divorce is often an extremely complex and involved undertaking. It can feel overwhelming, especially when discussing assets and finance, where small details may need to be addressed quickly. Because so much is happening all at once, though, it is not at all uncommon for the average person to make a mistake or two in safeguarding their own property and financial interests. If you know about such potential mistakes, it can be much easier to avoid them.

Not Taking Taxes into Account

It is normal for a divorcing spouse to focus on the assets in front of them and the convenience that those assets can bring. For example, the marital home may be targeted by both spouses because whomever remains will not need to move, which can cause considerable expense and trouble. However, it is also normal for the spouse who may come away with such assets to wind up with a considerable tax bill the following year. A marital home is cheaper in terms of taxes if you retain it. Most of the time, if you are awarded your house or condo in the divorce, you are able to claim the mortgage interest deduction on your taxes. However, if you decide to sell the house after it has been awarded to you, you are responsible for the taxes on the amount received, which can pose a serious problem for someone who did not expect it.

Another common tax-related issue relates to spousal support. While it can seem like a victory if the court orders your spouse to pay support, you must be aware that spousal support or alimony is taxable to the recipient, not to the payor. Thus, if you receive alimony and do not plan accordingly, you may wind up paying a significant part of that money in taxes.

Not Transferring Retirement Assets Correctly

The other serious financial mistake that crops up very often for divorcing couples involves retirement accounts. Plans such as IRAs are often divided by the court, but then the proceeds are distributed in such a manner that the recipient incurs unnecessary penalties. Normally, an IRA or the partial proceeds of one may not be transferred except upon the death of the account holder, but there is an exception for divorce. However, two factors do make a difference in terms of when the transfer should be made: the time relating to the divorce proceedings and whether or not the recipient may need to access such funds.

The reasons that both of these factors matter are fairly simple, and keeping both in mind and making the transfer at the right time can help avoid unnecessary penalties or taxes. For example, the Internal Revenue Code holds that transfers made “under a divorce or separation instrument” that meets the criteria laid out in the relevant statute are not taxable. However, if the transfer of funds is made before the conclusion of the divorce, some courts will hold that it is not “under a divorce decree” because one does not exist yet. If the transfer is made too early, a 10 percent penalty will be due, in addition to income taxes on the transfer.

Contact a Property Division Lawyer

Aside from parental responsibility issues, dividing marital assets is often the most difficult and protracted part of the divorce process, and it is easy to make mistakes that may cost you money. Enlisting a knowledgeable lawyer to help avoid such pitfalls is always a good idea. Our dedicated DuPage County divorce attorneys are happy to assist you. Call the office today to set up an initial appointment.

Source:

https://www.irs.gov/publications/p936/ar02.html

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