Financial Mines and Pitfalls of Marriage and Divorce

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Marriage

1) Marriage Financial Benefits

Married couples who file jointly qualify for higher tax deductions and credits. This can result in tax savings, especially if there’s a large income disparity between spouses. Spouses are entitled to receive Social Security benefits based on their partner’s earnings, which can be advantageous—again, especially if there’s a large income disparity between spouses and one spouse has much higher lifetime earnings.

Married couples can find discounts on health, car, and home insurance. Combining policies likely results in lower premiums. Spouses can make contributions to each other’s individual retirement accounts (IRAs) and have access to spousal benefits from any employer-sponsored retirement plans.

Sharing costs for housing, utilities, insurance, transportation, and other living expenses can mean significant savings. Pooling of resources can improve overall financial stability within the marriage. Marriage can help improve credit scores if one partner has a stronger credit history and higher FICO score. This can result in more favorable loan terms and lower interest rates.

2) Marriage Financial Risks

Marriage can bring financial benefits, but it comes with risks. If one partner brings significant debt into the marriage, that can affect their total financial stability. Premarital debt continues to be the responsibility of the individual but can impact joint financial goals and decisions.

Financial infidelity occurs when one partner hides financial information or makes large-amount financial decisions and commitments without the other’s knowledge. That may lead to mistrust, and mistrust can become conflict. Conflicts can also arise if one partner is a habitual spender while the other is a frugal saver.

Marriage changes your tax and legal status, which can have positive and negative financial implications and ramifications.

• A married couple incurs a higher tax rate when filing jointly than if they were filing separately.
• Tax-bracket thresholds, deductions, and credits are not double the amount allowed for single filers.
• Both higher- and lower-income households can face this penalty.
• It can happen at both the federal and state level.

Finally, financial obligations to extended family members can strain finances, especially if these were not discussed and agreed to beforehand. It is not uncommon today for someone to try to care for—and provide for—both their parents and their children from a previous marriage. Another area for discussion and agreement—before getting married.

Divorce

1) Divorce Financial Benefits

Divorce can be painful and challenging, but a few financial benefits might come after the divorce has been finalized. Without the need to compromise with your spouse, you now have the flexibility to manage your finances according to your own goals and objectives.

Divorce allows for penalty-free early withdrawals from retirement accounts under a qualified domestic relations order. The alternate payee can withdraw funds without the 10 percent early withdrawal penalty, but ordinary income taxes will still be due and payable. You must get a qualified domestic relations order (QDRO) from the court. If the plan holder is over 59½, they will not owe a penalty on withdrawals.

You may also find that you can make more individual strategic investment decisions without having to consult and discuss with your spouse. Divorce can sometimes improve your children’s eligibility for financial aid. Many newly single moms and dads were delighted to find that with lower income they could qualify for higher college financial aid for their children.

If you were married for at least 10 years, you are likely eligible for Social Security benefits based on your ex-spouse’s earnings. Divorce can be the opportunity to reassess and realign your own personal financial goals and strategies. Some people find that they can save more and reduce debt more effectively on their own, particularly if the spouse was a bit of a spendthrift.

2) Divorce Financial Risks

There are many financial concerns when it comes to dealing with a divorce. Some major financial issues that can arise include identifying and valuing assets, determining liabilities, agreeing on who and how expenses will be paid, dealing with tax implications and staging and planning for future financial obligations such as alimony or child support.

Splitting up assets like property, savings, and investments can be complicated, and may not always seem fair. Poorly valued assets can lead to a distribution that is unfair. Divorce can be expensive, costs can range from $10,000 to $100,000 depending on the complexity of the case, and the intransigence of the parties. Divorce lawyers can also play a part in stirring up strife to increase their fees.

Post-divorce, individuals can suffer a drop in their standard of living. Women over 50 may see a 45 percent decrease, based upon studies, while men may experience a 21 percent decrease.

The Alimony and Child Support portion and possibilities can be financially burdensome and last many years depending upon the court order (judgment) and the ages of the dependent children. Divorce can change your tax-filing status and affect your deductions and credits, and, consequently, can lead to unexpected tax liabilities.

Divorce can lead to disputes over who owes the shared debts, which if not dealt with and paid timely can affect your credit score. Dividing retirement accounts must be done carefully lest unexpected taxes and penalties arise.

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Summary

Financial considerations of marriage and divorce are especially important because they can significantly impact one’s financial well-being. Whether it’s a new marriage, remarriage, or divorce, understanding one’s current financial position, net worth, and potential budget impact is crucial. Finally, given half of the marriages will end in divorce, consider a prenuptial agreement, particularly if there are significant differences between the marriage partners in terms of net worth, financial views, spending and savings habits, and long-term financial goals and objectives.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.