Divorce’s Devastating Effects on Finances – Part 1

Divorce’s Devastating Effects on Finances – Part 1

planning divorce, financial Divorce.The U.S. divorce rate had dropped for three years in a row, dipping to its lowest mark in almost 40 years in 2016. However, the financial effects from divorce remain as devastating as ever. Depending on the state where you and your spouse reside, the average cost is from $15,000 to $20,000. If you are ending your marriage, it would be wise to be aware of the potential costs and learn ways of mitigating them. Consult with a financial divorce specialist for professional guidance.

Consequences for Both

The cliché in most movies is that the spouse who is earning the most will be the only one hurt financially. But divorce will be costly for both spouses. Most married couples are comprised of one spouse being the primary source of income with the other spouse providing little to none. On these polar opposites is one spouse afraid of being drained of finances and the other spouse scared of living in a shelter.

The first financial effect of divorce is the creation of two households. Although one spouse usually stays in the existing home, the other spouse will have to find a new living space. This split will result in two payments for mortgage or rent, utilities, cable, insurance, etc. Although the cost of living doubles for a couple divorcing, their total income stays the same.

Taxes for Capital Gains

Higher taxes may arise from divorce. Many couples who divorce quickly begin laying claim to or splitting assets. It is far from rare for a spouse to rapidly clean out checking and saving accounts, sell stocks and bonds, cash in CDs, and liquidate investments. Motivated by anger, distrust, and fear, such rash transactions often result in losses and unanticipated tax obligations.

If a couple has a joint account with $200,000 of investments, and they sold off their stock portfolio at the cost basis of $140,000, they may owe the IRS $30,000 for capital gains. If the money was kept in a traditional IRA and the divorcing couple liquidated the shares and took the proceeds prior to being 59 1/2 years old, they would be liable for capital gains and a penalty of 10%.

Part 2 will discuss the financial impact of alimony and legal fees.

Professional Guidance for Divorcing Individuals

John Faggio, CPA, CFP®, CDFA™, is a Financial Divorce Specialist. Faggio Financial helps divorcing individuals reach an equitable financial settlement in a professional, cost-effective, and expedient manner. Call (410) 884-4098 for professional guidance today.

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About the Author:

John Faggio is the managing director of Faggio Financial, LLC (www.divorce-finances.com), Maryland's only exclusive matrimonial finance practice. John is a CPA, a Certified Financial Planner® Professional, and a Certified Divorce Financial Analyst (CDFA®).

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