Essential Financial Considerations Before a Divorce Decree Is Finalized

April 22, 2025

Divorce is a significant life transition that requires careful financial planning to ensure stability and long-term security. While the process can feel overwhelming, addressing key financial considerations before the divorce decree is finalized can help individuals navigate this change with confidence. Since laws vary by state, it is essential to consult legal and financial professionals to make informed decisions.

1. Evaluating Income and Financial Support

• Spousal Maintenance Payments: Formerly known as alimony, spousal maintenance is often awarded when one spouse earns significantly less than the other or is financially dependent.
• Child Support: If minor children are involved, one spouse may be required to provide financial support to cover living expenses, education, and healthcare. If one spouse maintains health insurance for the children, both parties should determine how to share premiums and medical costs.

2. Managing the Marital Home

• Retaining the Home: If one spouse wishes to keep the marital home, they may need to refinance the mortgage in their name and offset the value by granting the other spouse a larger share of other assets.
• Weighing Homeownership Costs: Maintenance, property taxes, and potential repairs should be factored into the decision to keep the home. Any pre-existing agreements about improvements should also be addressed.
• Selling the Home: If the home is awarded to one spouse, the divorce settlement should account for future realtor fees and other selling expenses to ensure an equitable division of assets.

3. Dividing Retirement Assets

• Equitable Distribution: Retirement savings are often divided equitably, though funds accumulated before marriage may be considered separate property. For those divorcing later in life, retirement assets may represent a substantial portion of overall wealth, making careful division crucial.
• Qualified Domestic Relations Order (QDRO): A QDRO is a legal order that allows for the division of workplace retirement plans or IRAs without incurring a 20% withholding tax. It also enables the receiving spouse to withdraw funds without facing an early withdrawal penalty.

4. Understanding Social Security Benefits

• Spousal Benefits: Individuals married for at least 10 years may be eligible to claim Social Security benefits based on their former spouse’s earnings. This option is available as long as they have been divorced for at least two years and remain unmarried.
• Benefit Calculation: At full retirement age (65-67, depending on birth year), the spousal benefit can equal up to half of the ex-spouse’s benefit. Claiming before full retirement age results in reduced benefits.

5. Tax Implications

Divorce brings many changes, including shifts in your tax situation.

• Filing Status Changes: Once divorced, individuals can no longer file as “married, filing jointly.” Instead, they must choose between “single” or “head of household” status, each carrying different tax implications.
• Property and Mortgage Tax Considerations: Couples must determine how to handle tax deductions related to mortgage interest and property taxes in the year of divorce. Some assets, when liquidated, may also be subject to taxation.
• Spousal Maintenance Taxation: For divorces finalized before 2019, the spouse making maintenance payments can deduct them on their tax return, while the recipient must report them as income. However, for divorces finalized in 2019 or later, maintenance payments are no longer tax-deductible or considered taxable income.
• Child Support Payments: These payments are neither taxable income for the recipient nor tax-deductible for the payer. However, the child tax credit and exemptions typically go to the custodial parent, unless an agreement transfers these benefits to the noncustodial parent.

Financial Checklist for Divorce

To help ensure financial stability post-divorce, individuals should consider the following steps:

• Gather key financial documents, including recent statements for bank accounts, credit cards, loans, investment and retirement accounts, tax returns, and pay stubs.
• Identify assets that were retained before marriage or inherited, as these may not be considered marital property.
• Open an individual checking account for future income and expenses.
• Review monthly expenses and income projections to understand financial changes post-divorce.
• Ensure bills are transferred to individual accounts and remain current to protect credit scores.
• Update beneficiary designations on life insurance policies, IRAs, annuities, and retirement plans.
• Review and revise wills, trusts, and estate planning documents as necessary.
• Consider a divorce mediator to help minimize legal costs and streamline negotiations.

Seeking Professional Guidance

While legal representation is essential, working with a financial advisor can provide additional insight into asset division, tax implications, and long-term financial planning. A professional can help individuals make informed decisions that align with their financial goals, ensuring a stable and secure future beyond divorce.

Taking proactive steps before the divorce decree is finalized can help individuals emerge from the process with a clear financial strategy, minimizing stress and avoiding costly mistakes.

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This content is for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor for specific guidance tailored to your situation. First Western Trust Bank cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.