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Do's and Don'ts of Divorce Finances

Divorce is a confusing time, and you may not be thinking rationally.  Nevertheless, there are costly implications for making some very common financial mistakes that people make while they are going through separation or divorce.  Here's some solid financial advice If you are in the middle of a divorce:

1) DON'T quit your job to avoid paying alimony and/or child support – Don't be a loser!  Quitting your job, or changing jobs for one with lower pay for the sole purpose of avoiding alimony and/or child support, is a great way to sabotage any hope of an amicable divorce.  You'll look like a fool.  You'll still be required to pay because the judge can (and should) base alimony and child support on your past income history. 

2) DO withhold taxes from a 401k distribution-  You might be really strapped for cash, so you may decide to take an early withdrawal from your 401k.  That’s understandable.  Find out how much tax (and penalties) you are going to owe and have this withheld from the distribution. 

3) DON'T make a major purchase - There are a lot of reasons why you should hold off making any major purchases during your divorce.  Such purchases, like a new house or a car will probably throw a wrench in your divorce settlement.  You should wait until your divorce is final before you buy a new house or car, or any other item of value. 

4) DON'T sell highly appreciated stock for cash flow – Right now it might seem like a good idea.  You think, “I can always put this money back once things settle.  And I need the money now to pay for my divorce and for cash flow."  With a significant capital gain, and no losses to offset the gain, your tax bill will shock you.

5) DO take into account the tax implications of spousal support – So you’ve got an agreement in place, and your spouse is paying you alimony.  Don't forget that your spouse gets to take those alimony payments as a deduction on his or her tax return.  Guess what that means?  You now have to pay taxes on that income.  Receiving alimony is, for tax purposes, income. Make sure you account for this, either by setting up a separate account to hold the money in reserve, or by adjusting your payroll deductions.

6) DON'T assume “getting the house” is the best deal - You’ve all seen the tabloids and the newspapers looking at the high profile divorces.  People will say, “Well, she got the house, so she made out like a bandit.”  Unfortunately, not all assets are created equal.  The “house”, which in this case is the marital home, may be a money pit, may have negative equity (especially in this economy), or may just be too expensive for you to maintain.  Make sure you consider all of the options, including selling the house, before you make this decision.

7) DO planning – The biggest mistake you can make is not actually planning.  Divorce is a confusing time, and you may not be thinking rationally.  A good plan will prevent a lot of things from going awry and ruining your financial situation.  Stop, take a deep breath and consult someone who will help you to navigate the complex financial issues that are associated with your divorce.

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We are divorce and family mediation experts, serving families throughout Utah.  For a free initial consultation, or to answer your questions about mediation or the divorce process in Utah, please call us at (801) 633-1361, or visit