Even the most amicable of separations can be stressful and messy, especially when shared assets and debts are involved.
As the state of New Jersey divides a couple’s assets through equitable distribution rather than a clear 50/50 percentage to each spouse, it is even more vital that you prepare completely and meticulously for the division of assets in your divorce not only to ensure your financial well-being but to also take advantage of the tax benefits therein.
1. Remember, The Tax Man Cometh
Everyone knows that the job of the IRS is to take full advantage of the tax laws to accumulate as much revenue as possible for the government. When discussing a division of assets, it is important to look at the tax breaks or the end of exemptions based on filing jointly or not. Work together with a divorce financial planner or tax accountant to minimize the total taxes you and your spouse will pay during separation and after divorce; you can share the money you save. Remember that both spouses are liable for taxes due as a result of audits on joint returns, so it is usually in your best interest to work together and minimize possible liabilities. If you are facing complicated tax issues in your divorce, it’s best to consult with an experienced family law attorney and an accountant.
It is no secret that the U.S. tax tables favor a status of Married Filing Jointly over Married Filing Separately or Single. Filing Single means that the IRS receives more in taxes from two single individuals than one married couple. Not only is there the burden of allocating the couples’ income and assets to cover the additional expenses of two separate households, the IRS becomes a possibly larger beneficiary of that same amount of money.
Timing will have an impact on eligibility for benefits and taxes owed. For instance, if one spouse expects a large bonus or equitable distribution in the current year, it might benefit both parties to stay married through December 31st to file Married Filing Jointly to enjoy a lower tax bracket. Or deferring retirement for a year or two might enable the non-employee spouse to bridge health insurance until age 65. And selling a primary residence while Married, even if one spouse has not lived there for years, will enable a couple to realize the $500,000 capital gains exemption rather than one spouse selling the house as Single with only a $250,000 exemption. So strategically choosing the year of your divorce can have significant benefits or costly consequences. For these reasons, a couple might choose the timing of their divorce or file a legal separation (if offered in their state) which enables them to divide assets but retain their Married marital status. (Be careful here as some employer plans treat a legally separated spouse not eligible for marital benefits.)
2. Get All Financial Documents and Bank Statements In Order
Getting a clear view of your financial standing as a couple is vital in determining the best time to get a divorce. Here is a brief list of the most important documents you should obtain:
- Checking and savings account statements (past year)
- Retirement account statements (current, if contributions haven’t changed)
- Investment account statements (past year)
- Ledgers for any loans, including your mortgage, auto loans, and personal loans (past year)
- Credit card statements (past year)
- Recent pay stubs
- Lists of assets and debts brought into the marriage and those accumulated since marriage
- Income tax returns (past three years)
The Institute for Divorce Financial Analysts offers a checklist of financial records you’ll want to prepare.
3. Start Developing Financial Independence Before Legal Separation
Whether you were the sole breadwinner, completely dependent on your spouse, or somewhere in between, getting divorced means you need to start establishing financial independence, which involves several key steps:
Create a budget
You will need to create a budget to ensure you are living within your means. If you do not currently maintain a budget, this is a really important time to start. Identify all of your current sources of income and all of your current expenses. Once you have a good working budget for your present situation, begin putting together a post-divorce budget. According to the experts, one of the biggest mistakes people make is keeping a house they can no longer afford. Remember, the same income used before for one household will now need to support two.
Open your own accounts
You need to establish your own accounts leading up to and following your divorce, including bank accounts, credit cards, utilities, and more. While you may need to spend some time getting back on your feet, do not neglect future planning. Establishing an emergency savings fund and a retirement account is crucial, especially if you were previously relying on your spouse’s income.
Start building credit
Building credit is important for the newly single person, especially if you did not have a strong credit history before. Getting a starter credit card for everyday purchases can help you start building credit. Remember, the single most important factor in establishing credit is paying your bills on time.
Get Professional and Experienced Help
At Jacobs Berger, LLC, our job is to work with you step by step to provide the knowledge and experience you need from a law firm. We want you to go from distressed to de-stressed while acknowledging that this is an emotional time for your family.
We do things the right way by keeping you informed, tailoring the agreement to your unique needs, and providing creative, multi-faceted solutions. Our practice is located in Morristown, Nj and we can be reached by filling out the online form or you can call us at 973-710-4366.