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Avoiding common tax and other financial errors in divorce

On Behalf of | Nov 6, 2018 | Divorce

For some people in California, the challenges of divorce can include making some common financial mistakes, but awareness of those errors may help people avoid them. Many mistakes happen because people do not have a financial plan in place. They can create one of these with the help of a professional.

People should be aware that alimony payments will cease to be tax-payable or tax-deductible for divorces that are finalized after the end of 2018. They should avoid taking actions to avoid alimony such as quitting a job. The costs of this will outweigh the cost of paying alimony. Actions such as going on a spending spree during the divorce or selling assets to pay for bills can also backfire. In the former case, it is simply because those bills must be paid in the long run. In the latter case, it could be because there might be hefty taxes associated with liquidating assets.

Taxes are also an issue when it comes to dividing a 401(k). There will be taxes and penalties unless the couple gets a document called a qualified domestic relations order and rolls the distribution into an IRA. It is important to understand the financial implications of keeping certain assets as well. For example, a person who keeps the marital home should be able to afford the mortgage.

Other types of property and property division also have costs associated with them. There may be particular rules around pensions and annuities. In addition, if a couple decides on a plan for property division in which one takes certain assets and the other takes different assets that have an equal value, they should be sure they correctly asses the value of those assets. For example, if one asset is tax-free and the other is taxed on distribution, they are not really of equal value.