Today we are discussing divorce. It’s not the cheeriest topic to kick off the new year with, so why is it on your mind?
We just finished the holidays, and are now entering what some call the divorce season because divorce filings begin to spike in January, peaking in February and March. Indeed, studies show that one in five couples start considering divorce or separation once the end of year festivities come to an end. And the first Monday of the New Year – today – is unofficially known as divorce day because it is the biggest day for divorce filings.
What causes this spike in divorces after the holidays?
There are a few reasons divorce filings rise in the first part of the new year. Some couples simply don’t want to get divorced during the holidays. Many couples, especially those with children, stay married through the end of the year so their family can have one last holiday season together.
For others, the holidays push them to the breaking point. As we know, emotions can run high amid the pressures of family, gifts and other commitments. Alternatively, some couples get swept up in the feelings of the season and think they can make their relationship work, but return to reality after the holidays are over. Finally, January is a time for making resolutions, and some people resolve to make a fresh start in the new year when they are unhappy in their relationship.
What should our listeners keep in mind, financially speaking, if they are considering divorce?
Divorce is obviously a big decision, and the first thing anyone should ask themselves is “Is this what i really want?” However, if you have made up your mind, or if you think it is likely, there are some things you can do to prepare yourself financially.
I always advise people to maintain a level of financial independence, not matter what, and this is especially important if you are considering divorce. The most important thing to do is to start saving money. Getting a divorce is expensive, so it is important to prepare yourself for those costs, and to live on a single income once your divorce is final. If you do not already have one, you need to open a separate bank account.
Depending on your situation, you may also what to close joint accounts. If you and your spouse have joint credit cards, either cancel them or remove one spouse’s name. If you have a joint bank account, consider splitting the money and closing the account. And you want to reduce unnecessary expenditures. Avoid making large purchases or splurging in the lead up to filing for divorce.
Documenting your financial history is also important. You want to track your finances, including your income, your spouse’s income, your expenses, debts and assets. You need to get duplicates of important financial documents like bank and credit card statements, retirement account statements, pay stubs, tax returns and receipts for expensive purchases as well. Once you do this, you want to keep copies of these records in a secure place outside of your house, like a safe deposit box or with your attorney.
Is there anything else to keep in mind for those couples who are splitting in 2019?
in fact there are. As a result of the 2017 tax law, the rules will change for new divorcees. For example, alimony paid will no longer be tax-deductible and alimony received will no longer be taxable income. Until now, alimony has been tax deductible for the person paying it and taxable income for the person receiving it.
This change could make the process of divorcing much uglier, since high-income divorcing spouses are likely to fight to pay less in alimony, since the government will no longer subsidize these payments via the tax deduction. On the other hand, lower-income spouses will seek to get as much money as possible, since there will be no tax burden, meaning that income will go farther. All of this is a recipe for nastier fights over finances during divorce.
These changes will not affect people who are already divorced, as their agreements are grandfathered in. However, the new rules could affect them if they modify their divorce agreement. So, be extremely cautious when modifying divorce agreements from here on out.
The tax law may also affect pre- and post-nuptial agreements. Some new rules could nullify items in these agreements, so it is important to have an attorney and a financial consultant review pre- and post-nuptial agreements you have.
Finally, one last item for divorcees to consider when sorting out finances. Remember that the tax deduction for children will be much lower. The 2017 tax law eliminated the $4,050 exemption for each dependent, through 2025. The child tax credit (which offsets taxes owed, dollar for dollar), however, has doubled from $1,000 to $2,000. This could be a big consideration for many families during divorce.
Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.