How the Tax Cuts and Jobs Act Will Impact Your Divorce

How the Tax Cuts and Jobs Act Will Impact Your Divorce

If you’re planning to get divorced this year, you might want to act quickly - the Tax Cuts and Jobs Act will be taking effect soon - and it might just impact your divorce.

How the Tax Cuts and Jobs Act Will Impact Your Divorce

The Tax Cuts and Jobs Act will effect divorces that happen after December 31, 2018. Under this new set of laws, a taxpayer that pays alimony payments will no longer be able to deduct the payments from his or her spouse. And the alimony recipient will no longer pay taxes on that income. If you are planning on divorcing this year, you might want to act with some urgency. Why? Some states, such as California, require a six-month waiting period for a divorce to be finalized. So if your divorce process has not been started, you might miss the December 18th, 2018 deadline for the alimony deduction. In California, alimony payments generally last for half the life of the marriage unless the couple has been married for at least 10 years, in which cases, those payments can last for life. When you decide to end your marriage, it can feel like the end of your financial freedom. How will you handle child support payments or even manage to get food on the table now that you are down to one source of income? It can feel impossible. But just as divorce does not mean the end of your life, it also does not mean the end of your financial freedom.

The End of a Marriage

There is nothing easy about ending a marriage. You’re going to feel out of place for a while. Everything is new. Chances are you’ve had to rearrange your schedule to now pick up the kids from their dad’s house every other weekend. It might mean you’re not spending Christmas with your parents so that the children can spend Hanukkah with their mom’s family. You might need to set up an automatic child support and spousal support payment to your ex-husband for every third week of the month. Or maybe you need to call your now ex-wife to make sure that she drops off the soccer cleats at the school that your son left at his house over the weekend. Regardless of what the situation is, things have changed. And that means your financial situation has. But just because everything is different, that doesn’t mean you should steer your course for financial ruin. Yes, losing a second income is hard. It can be especially hard if you were living off of one income and now have to go back to the land of the full-time worker. These are some tips and tricks that can help ensure that your divorce doesn’t translate to financial ruin.

Gather Resources

“Don’t go it alone,” says Mike Lynch, vice president of strategic markets at Hartford Funds. “Build a team today – a qualified team of legal, tax and investment professionals. Maybe it’s your current investment professional, or you may seek a new one that understands your situation better.” You’re going to want to put together a legal team to help you reach a settlement in regards to child custody and property division. But you might also want to consider bringing on a team of financial professionals to advise you on things such as how your taxes will need to be filed (Alimony and child support can have large financial impact), in addition to how to make money work for you now that there is only you to help pay the bills.

Specifics To Keep in Mind

Certified divorce financial analyst Eva Sachs, Emily McBurney, an attorney and qualified domestic relations orders (QDRO) expert, and certified divorce financial analyst Donna Cheswick also have this advice:

Budget

Sachs says the first step toward financial independence is balancing your income with your expenses. This can be hard to do if you’ve never had to in the past. He advises you sit down and look at how much money is coming in from various avenues like work, alimony and/or child support payments, and then assess how much of that is going toward living expenses. “Think of it as a spending plan rather than a budget,” she says. “Knowing where your money goes is key, especially after divorce. These will be many new expenses you might not have thought about prior to your divorce; this is a critical time to refrain from spending money you don’t have.” Change Your Benefactors Most likely your spouse was your main benefactor during the marriage, but that is probably not going to be the case moving forward. To remedy this, one of the first things you need to do is update the beneficiary on your life insurance and retirement accounts. “Review all of your accounts and insurance policies and change the beneficiaries. A divorce does not automatically terminate your former spouse’s rights to be the beneficiary on your retirement plans, bank accounts, and life insurance policies –- even though your divorce decree might say that your former spouse has waived all rights to the benefits,” says McBurney. “You will need to formally submit a change of beneficiary form to each financial institution. Otherwise, the benefit will be paid to whoever is listed on their forms at the time of your death – regardless of your divorce.” Take this opportunity to reflect on the people in your life that are around to support you and encourage you. This can be a hard step, changing your beneficiary, because you’ve never imagined having to remove your spouse. Additionally, you’ll want to revise your will, says Cheswick. “Meet with an estate planning attorney to discuss your state’s laws regarding possible updates to your will, power of attorney and advanced directives,” she suggests. “You want to be sure that your former spouse is no longer entitled to any distribution in the event of your death. And if your settlement agreement requires one party to maintain life insurance on the other, then this needs to be a method in place to be sure this is actually occurring. Just because the former spouse says they will do something, doesn’t mean that they are following through.”

Property Division

Marital property division is governed by state laws, but can still get contentious. You will need to check with a family law attorney to see if you live in an equitable distribution state or a community property state. There are four steps to dividing marital property:

  1. Identify assets owned by you and the assets owned by your spouse
  2. Categorize all assets as “marital” or “non-marital” property (an attorney can help you determine this)
  3. Assign a value to each asset (you might need an appraiser for this)
  4. Devise a plan for the division of assets that is in accordance with state laws

Consider Selling Shared Property

Instead of fighting over who will retain ownership of the family property, consider selling it and splitting the proceeds. This is a way for each spouse to “break even.” When it comes to a secondary home, “It’s much more effective to sell the house and distribute the proceeds to the children,” says Ric Edelman, chairman and CEO of Edelman Financial Services. “You get into the issue of fights amongst the kids – issues of maintenance, repairs and upkeep.” after their divorce is finalized and there are still outstanding items which have not been resolved," she said. “Remember that the agreement is a legally binding contract that you both signed and agreed to uphold. If one party is failing to comply with the terms of the contract then the other party has every right to take steps to ensure their compliance including going back to court to have the agreement enforced.” Plan for Retirement As the divorce gets closer to being finalized, Sachs advises looking to ways of maximizing your retirement savings. “Don’t let divorce stop you from planning for your future,” she said, “Investing in your 401K plan will allow you to save for retirement. You can begin by saving a small amount each week and then let it build slowly or make payroll contributions that match your employer contributions. Don’t stop thinking of the future!” Just because you are no longer going to be sharing your golden years with your ex-spouse, that doesn’t mean that you can’t have the time of your life. Getting your financial situation under control is the first step to taking back your life and claiming your bright future.

Working with a Divorce Attorney

If you are facing a divorce, you should work with a divorce attorney that can take a look at your specific situation and give you advice based on it, rather than approach it with a one size fits all mindset. Your specific situation will be particular to you and your marriage and the way your life was set up during the marriage. This might mean major financial decisions regarding retirement funds, property, child support and custody, and alimony. A divorce attorney will work with you to help you decide how you want to tackle these elements of your marriage and divorce, while also providing guidance and support. They will be able to lead you through the process while keeping you from procrastination and caving into pressure. They’ll also be able to help ensure you meet all the required timelines while ensuring that you get a fair case and trial should you need to go to court. Lastly, they’ll be able to help you find the freedom and new life you are seeking - one that is entirely on your terms. For advice on divorce, you need the expert law firm of 619 DIVORCE. Schedule a consultation today. (619) DIVORCE 3555 4th Ave San Diego, CA 92103 Phone: (619) 503-3050