Redo the budget
Going from “us” to “I” usually means having to move from two paychecks to one. People who don’t make an honest assessment of what they can afford under their new financial setup may find themselves with cars, houses and other bills they would never have signed up for when they were alone.
People deciding what assets and belongings they want to keep after a divorce should ask themselves if they would still make that purchase with the income they’ll have after the split. For many of our clients, a lot of it comes down to needs versus wants. Many times you need to take a step back to see what’s reasonable.
Know your credit standing
Even when money and belongings are split equally, two people may find themselves on unequal ground when it comes to their credit scores. This can be especially true for couples where one person was the primary breadwinner. You can have one spouse that really never worked or established credit in their own name. To build or repair your credit history, start by paying down debt, especially anything owed on a credit card.
Making steady payments and freeing up available debt may help people lift their credit scores to the point where they qualify for their own credit card. Closing a card that both spouses had access to may ding both people’s credit scores, especially if it is an account that has been open for a long time. But people should track spending on any shared cards, otherwise, someone might end up on the hook for a bill racked up by an ex-spouse.
Create a new retirement plan
Retirement assets, savings accounts and pensions are typically divided up along with other assets when couples file for divorce. For some people, that may mean working longer or taking on a part-time job in retirement. One thing to watch for as assets are being divided is steep taxes and withdrawal penalties. People should also think about changing the beneficiaries on their retirement funds to that of another relative or loved one if the fund was previously designated for a spouse.
Learn the new tax rules
Once the divorce is final, each person will probably need to file their tax returns as single. If they have children, the spouse who has custody and is providing more than half of the costs of supporting them, may be able to file as “head of household”. But it’s not just the filing status that changes. Some people may find themselves in a higher or a lower tax bracket after filing on their own. Depending on who is keeping the home, investment accounts and other assets, the tax breaks a person can qualify for may also change after a divorce. For instance, only one person can claim child-related credits after a divorce.
If the divorce isn’t final, both people may still have to file as married. Some people waiting to finalise a divorce may decide to do their taxes as married filing separately, in order to start treating their finances individually, but that may disqualify them from certain tax credits and deductions and lead to a higher tax bill. Some people might be able to file as unmarried, but only if they meet certain requirements, such as paying for more than half of the living expenses, housing a dependent or other child not living with the spouse.
One mistake divorcees make frequently is assuming the need for life insurance might end with the marriage. In addition to any policies purchased for children, one person may still need to buy life insurance if they’ll be responsible for child support payments after the divorce. Such policies are typically put in place for a set time period, such as until one spouse gets married or the beneficiary reaches retirement age. A divorce is still a good time to re-evaluate insurance needs overall. Some people previously covered under a spouse’s plan may now need to shop around for their own plan.
Extracts from an article by Jonnelle Marte, which originally appeared in The Washington Post
Posted by Sinta Ebersohn (Creator of fairdivorce.co.za – Stellenbosch)