Divorce is obviously a huge emotional experience for everyone involved, but it also takes a toll financially — often on both spouses. The immediate financial burden occurs due to the separation of the household: As couples split, they often wind up doubling their housing, utility, and other ongoing costs. Then, of course, there is the division of assets, which can impede both individuals’ progress toward funding long-term goals like retirement or children’s education.
If you’re going through a split, here are a few things to keep in mind.
Watch the assets: If you are going through a divorce, pay careful attention to the type of assets that you acquire in the settlement. One reason is cash flow: Even when the math shows an equal split, one of you could get stuck with an illiquid asset that might be tough to dispose of if cash flow becomes an issue.
You also want to factor in an asset’s taxable status: For many couples, $100,000 brokerage account, for which you’ll just pay tax on capital gains or dividends, could be more valuable than a $100,000 tax-deferred retirement account, where you’d have to pay income tax on withdrawals.
Keep an eye on tax impact: Taxation also plays a role in continuing income: Payment of alimony is tax deductible; receipt of alimony is considered ordinary income — but receipt of child support is not taxable to the recipient. This may change your tax prep and the amount you owe the IRS, so be sure to keep it in mind the next time you file your taxes.
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