Common Divorce Mistakes: How to Avoid Financial Pitfalls
When you’re to the part of your divorce where you have to negotiate your financial settlement, understanding your situation and your options is key. Here are some of the things that many people miss when settling their finances:
Property Taxes
It’s easy to think of a property as a simple asset, but remember that that asset comes with a built-in liability: you have to pay taxes on it. If you don’t understand the tax basis of the property, you’ll miscalculate the value of the property and reduce the value of your side of the settlement. Also be aware that the assumed liability of the taxes changes depending on whether you intend to keep or sell the property, so to a degree your own future plans make the asset more or less valuable.
Carry Forwards
More and more since the economic collapse, tax returns are showing a lot of ‘loss carryforwards’ — meaning that if your business or investment takes a loss in one year, you can apply that loss to your next year’s profits and thus reduce your tax liability for next year. If you or your spouse has any loss carryforwards, be aware that it’s very easy to overlook them — they have value as a tax benefit, and can affect the basis of any relevant property. Any unused carryforwards (they can be held for up to seven years) need to be treated like every other asset and put into the pile to be distributed.
Retirement Plans
Retirement plans have different rules, and it’s all too easy to set up your divorce settlement in a way that attempts to make payments into a retirement plan in a way that the plan doesn’t actually accept. Some plans may freeze your funds for a period of time if you make specific investment choices, or prevent you from splitting the benefits if you make certain investment choices. Be certain that you understand all of the facets of your retirement plan and how exactly it will affect you and your ex in the long-term before you decide how to include it in your settlement.
COBRA Health Insurance
The Consolidated Omnibus Budget Reconciliation Act — or COBRA — allows some divorcees to continue the health coverage that they had from their ex’s job at 102% of the total premium paid by their employer. Under the Affordable Care Act, health insurance is mandatory, so making sure that the covered spouse understands what options they have is important — and if they’re going save money by using the coverage of the covered spouse under the COBRA rules, that can count as an asset and should be taken into account.
There are dozens more details that can and should be taken into account when the times comes to separate from your spouse, but these require a bit of attention above and beyond what they normally receive.
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