Navigating Finances in Divorce

0:00 Ralph: Have you ever been standing at the edge of something huge? a, change, you know, is coming. But you're dreading it. that's how many people feel when facing the prospect of divorce? Your heart is breaking. And on top of that, you're staring down the barrel of financial uncertainty. What happens to your home? Your savings. Your entire way of living shifts beneath you. On this episode of the Ask Ralph podcast, we're getting real. We're going to delve deep into the financial and tax side of divorce with a Christian perspective. Listen folks. My goal is to offer both guidance and hope through what feels like an impossible situation. So let's get started.

1:11 The truth is I think we need to start by acknowledging the challenges. Divorce is a gut-wrenching process. Something I don't recommend highly, but at sometimes the reality can't be avoided. It just is what it is. Beyond the personal heartache, there's a swirling financial hurricane. Maybe you're facing a battle over the house. It's not just a structure. These walls, hold memories. They're huge for that. But can you realistically ? Keep it without your ex's income. Will you be trapped if you do. Well, let's talk about that specifically. I've come up with really four main options to that.

1:52 And option one is pretty simple. Sell the home and split the proceeds. This is really the cleanest solution. Especially when emotions are running high. Truth. Is it severs financial ties. It's a clean break. As it relates to the home, but it carries these considerations. These are things you absolutely have to think about. The housing market. Is it a good time to sell? You know, a buyer's market means you might not get the price you hope for. You hope you're in a seller's market, but what if you're not. All of this impacts how the money will be divided. You also have to think about transaction costs. Factor in your realtor fees, closing costs, these eat up the profit.

2:34 you might be in a situation where your home's not worth enough to even sell it. And come out clear when you look at the closing costs. It could be in the other situation too, with capital gains of the home's value, increased significantly since purchase, you could face capital gains taxes on your portion. So all the more important to consult with a tax advisor. That really covers option one. And that is just simply sell the home and split the proceeds. Option two. I've seen this happen many times in my practice, one spouse buys out the other. Yeah, this is a way to keep the home in a family. It's also a huge bonus if kids are involved. But it can be complex. So you need to navigate this wisely.

3:14 the thing is you got to start with that accurate appraisal. You can't just pick a number. You got to get a professional appraisal, determine the fair market value, of the home. And if you're already fighting about the marriage, Got to make sure you do this above board. You got to think about the term called equity. Well, what is equity Ralph? Well, how to calculate one, spouse's owes the other subtract the outstanding mortgage from the appraised value. It's pretty simple. the remaining some is what's owed to the other spouse. Who's leaving the home. Of course, that sounds good on paper. But getting to that can be a challenge. you also could refinance the mortgage, the spouse, keeping the house needs to apply for a new mortgage. Well, what if their income doesn't qualify? what if their credit's not great, what?

3:56 If this divorce was caused by bad credit decision, maybe on both parties. So they got to qualify. So that's why, keeping the house or one spouse buying out the other can sometimes be a challenge. Now here's another option. I seen this happen too. And sometimes this works and sometimes it's a disaster. And that's option three, continue to co-own. I think this is at least common. And my friends, it only works in amicable divorces, which to my experience is not very common. They might start that way. They usually don't end that way. and maybe the goal there is to keep the house for the children until they graduate from school. And I've seen it work. I've also seen it become a disaster.

4:38 So, what are some risks involved with that? Well, here's a big risk. What if one spouse defaults? If the remaining co-owner misses mortgage payment, it hurts the credit of both people. you might be counting on that income from both of you, even though you've separated yourself. in divorce. If one of you can't afford to pay, you're going to affect both people's credit. Another huge thing. And I've seen this battle out time and time again is maintenance, disputes, who pays for a new roof. If there's a major repair. This needs to be laid out crystal clear in a detailed agreement. Not a lot of times. It's not. And then you just get into, battle number two or battle number 17. It's also really awkward.

5:18 you couldn't make your marriage work. What makes you think you're gonna be able to work together on housing matters when emotions are still so raw? Now the final option, this isn't a great one. But I've seen this play out as well with some of my clients and that's a for sale by the court. truth is if both parties are uncooperative, the judge might order, the house sold. Often on an accelerated timeline is not great for you financially. Oftentimes, this usually means getting lower than market value in is the least desirable option. So those are really the big four things I think you can do. When you've got the joint home, you can. Sell it. Cut your ties. You can. One spouse buy out the other networks sometimes.

5:59 continue to co-own it and figure out that, in some kind of written agreement, or you can let the judge do it. And I don't know that's the best option either. So here's some other things to consider things you might not have thought about children. if one spouse has primary custody, keeping the home for their stability might be the priority. But you got to think about that financially. is that a realistic decision? And then if you're going to stay in the home together, or are you going to own it together? how are you going to deal with those marital versus separate funds? If one person came into the marriage already owning the home, Or made the down payment with premarital money that can influence the division of assets. So this is where you got to enlist a team. get a lawyer and accountant, that sort of thing. and don't dismiss. The emotional attachment the house is more than just walls and windows.

6:40 I remember when I was a kid, my parents split up when I was about eight. It was such a difficult time to go through. And to be honest with you, my dad left, my mom stayed. we stayed in our, youth home in, which was great because to me that was reassurance. But, it was one of those situations where, I wasn't involved. I was eight years old, so I didn't know what was going on behind the scenes, but, look looking at it when I got older, I guess my dad kind of did the right thing, kept my mom in a home. So that my sister and I could have some stability there. those are tough things. So let's talk about some action steps you can do, when you're looking at, how are you going to handle the house? Number one thing. Action. Step, get an appraisal. No matter which path you pick of the four things I talked about.

7:22 You got to get an objective appraisal because that's going to be something that you're going to need. It's going to help prevent arguments. Another thing. I'm going to tell you to do another action. that is vital consult professionals. Don't do this alone. I've seen clients try to do a divorce on their own, and it turns into a disaster. A divorce lawyer and a financial advisor, a tax specialist like myself, both familiar with the complexities are essential. Don't think you're going to get away without doing this. It's critically important. Another thing, biblically, as a Christian, we need to prioritize honesty. You can't try to hide assets or downplay the home's value. It's going to backfire you on a long run. My experience has been.

8:03 Couples who make this work for their children or for themselves are honest with each other. listen, the marriage didn't work. Who knows why. It doesn't even matter about blame at this point. But be honest about where you are and you got to have those hard conversations. And this is one of the biggest action steps. If kids are involved. Have a hard conversation. And agreement on how to explain the changes. to them is critical, enlist help with that. go find some, at your church to deals with this, or go find a counselor that deals with this. Cause you're going to be co-parenting now. Even if you're not living under the same roof. You've got to address how to handle these discussions in a healthy way. The truth is handling the home is a huge piece of the divorce puzzle.

8:46 it's about more than finances is about your future. So don't rush this decision out of fear, anger, seek support. Get good counsel and make the choice. that allows you to build a solid foundation for your next chapter. Cause you're going to move on to your next chapter. That's the hope here. It's going to be a new season. So here's some other things you got to consider. You've got to consider alimony or child support stress. these payments can dramatically alter your entire budget. So not only are you thinking about selling your home, but what about your budget? whether you're receiving or paying alimony or child support. There's. Uncertainty here and it amplifies your anxiety. There's also tax time. terror. Gonna talk about that in a few minutes. that married, filing jointly is gone.

9:27 And your tax picture changes significantly. You got to brace yourself. You gotta be aware. You gotta have knowledge, how that's going to work out. Find an expert that advice is worth its weight in gold. And amidst all of the financial part and the difficulties you're wrestling with guilt and shame. A lot of time, you may be carrying spiritual burdens on top of everything else. You may said, Ralph, I did everything I could to make this marriage work, but it didn't work. remember friend God, doesn't condemn you for you're walking a hard path, no matter what the circumstances are. He always offers grace and strength to endure. So let's talk about some concrete actions that you need to do. in the midst of the storm, you got to shift into a strategy mode.

10:09 It's time to move from overwhelmed to empowered. That's the key to that's. If you're going to survive and thrive in this, you got to move from being overwhelmed to empowered. The first step in that is to assemble what I call your dream team. A divorce attorney. You trust is crucial. But don't forget the tax side. find a tax advisor, a public accountant who knows the divorce landscape. If you're looking for a tax advisor, you can go to my my website at askralphpodcast.com/store. And you can book an appoint with me and let me know how I can help you during this difficult process. The truth is mistakes here can cost you big time. Invest in advisors to help you. Another key thing is documentation is everything.

10:49 You've got to gather your financial paperwork, like it's your survival kit. Bank accounts, retirement plans, debts, proof of property. This isn't fun. This is difficult stuff. This is stuff you don't want to deal with. But having the details means navigating this with your eyes wide open. It got to do that folks. You've got to have your eyes wide open during this it's a stressful time. It's absolutely, probably one of the most stressful things you're ever going to go through. Another action step is that dreaded new budget. pretending life will stay the same is a recipe for disaster and sinking. You're going to fail if you don't fix this. You got to be brutally honest with yourself about what you'll live on post divorce. It's ugly.

11:30 Heart-wrenching work. But it's the cornerstone of good choices in how to fix your financial situation. Moving forward. And this is a really important part. You've got to guard your credit, like a fortress. you got to close those joint accounts. The moment the decision is made, you can't assume that the other party is going to be honest and do the right thing. Seen this happen so many times. Monitor your credit report. I've done many episodes about credit, how to get a copy of your credit report, how to fix your credit. If it's going sideways. This is the time to really focus on that. you got to protect your future. It's just you now. It all these financial things are gonna come on. maybe you have to buy a new home.

12:11 Your credit's going to have to be good. Maybe you have to buy a new car. Your credit's going to have to be good. And it's all so very important. And don't underestimate the emotional toll of divorce. Seek out grief counseling. I firmly believe in faith supported groups. these investments in your sanity. These things are going to help you make smarter financial decisions amidst the turmoil. And trust me. It's going to feel like a blur at times I've been through it. I know many clients and friends have used a program called divorce care. So I would highly recommend that when it's offered in many churches. Now let's have that tax talk and stick with me during this. I know taxes is nobody's favorite topic, especially not now. But here's the breakdown. You need to understand these things.

12:53 The first thing we talked about a few minutes ago is your filing status has now changed. You can't file jointly the way it works is whatever your marital status is on the last day of the year, you're considered that for the whole year. So if your divorce was granted, even on the last day of December, You're considered divorce for the whole year. So you really have two filing choices at that point. You can file single or you can file head of household. These are really your most likely options. Again, this is why you need to talk with a tax advisor. To get good information. And really that decision comes down to whether you have primary custody of the children. And let's discuss alimony. 'cause alimony is not what it used to be.

13:34 The tax deduction for alimony has gone in recent years. it used to be that you could take a deduction for what you paid an alimony. And the person you're paying had to share that as income. now, that would mean if you're paying it. It's given you a break. And if you're receiving it, it was a bit of a problem because it was income. Maybe that's unfair, but you can't do that anymore. And that's just the reality. So you got to live in reality folks. One important component of that is child support that stayed the same. This was never considered deductible for the payer. And it's not considered, income a person receive. And I get this question a lot. When somebody comes in, they've just gone through a divorce. And they say, Ralph, I'm not getting any alimony. We kind of split things equal, but I do get child support because on the custodial, parent, do I have to pay tax on that?

14:16 Answer's no. It's not taxable income to you, and it's not a deduction for those who pay it. Now let's talk about the battle over the kids. Not, I'm not talking about the emotional battle. I'm talking about the tax battle. Unfortunately, I see this play out every day in my practice. Who claims the kids is dependent is hashed out during the divorce proceedings. Usually. That sounds good. But in reality, it never worked, kind of works out like that. So you got to get this clearly spelled out in your separation agreement, along with any future modifications. This can avoid nasty surprises later. And unfortunately I see these routinely. I see these battles all the time and they get really ugly. So make sure you document everything. So let's talk about that battle over the kids in a little bit more detail.

14:58 Here's some basics. The IRS generally lets the parent whom the children live with most of the year claim, the major tax benefits. It's what they call the custodial parent. So if the kids live with you, More than they live with the other party. That's what the IRS would call the custodial parent presumption. Why is that important? Well, as a custodial parent, you're going to be able to claim head of household status. You're going to get the child tax credit. You're going to get that. Credit for other dependents. It's absolutely more favorable than filing single. Now there are some exceptions to that. There's a thing called release of claim. It could be the custodial parent can choose their release, their claim, allowing the non-custodial parent to gain the tax benefits.

15:44 I want to get into the weeds done on form 83 32. It's signed by the custodial parent. Well, why would you do that, Ralph? what will be the reason for that? Well, Let's just say you can be amicable. At times there's an income disparity. Sometimes it makes financial sense for the higher earning parent to claim the kids that just that simple. I've seen this happen a lot of times. and you just have a discussion with your ex and say, listen, I'll let you claim the kids. I know you make more than I make, but they'll throw me a couple of dollars back. Happens all the time. This is very common. tax deductions and credits are more impactful when your income is higher. So if you got one parent, let's just say, for example, You've got one. Parent is not working now. They're, they're primarily taking care of the kids.

16:25 And the other parent is working. And then maybe you have a decision to see, Joe, Joe and Sally or Mary, Hey Joe, you claim the kids, you claim how to household. But let's split the tax benefit and you, if you hire somebody like myself, we can figure out what that tax benefit is. this is gonna be a negotiating tool. This can be bargaining power and a divorce settlement. So don't automatically give this away without asking for concessions in the other areas. And I'm going to say this. Be very careful. I told you to go get an attorney, but be careful what you do there. And I'm not saying attorneys are bad folks. they have a job to do. But the truth is in my experience, the person who makes the most in a divorce is the attorneys. So be cautious about if you can work things out. in the bounds of, keeping things real and keeping things legal.

17:07 You should do that. Now, sometimes there's joint custody. That's when the custody split 50 50. I see that more and more these days. Which leaves the IRS with a huge problem, and they have to figure out, who gets to claim the children. Now sometimes it's, I claim the child issue. You claim the child next year, that happens. and none of this really impacts child support. So don't worry about that. That's not a big part of that. the fine print is this. You can release that claim, but not right directly. So as the custodial parent didn't, if he didn't file that form 83 30, 2 of the non-custodial parents tax return, you can't fix that later. Claim sticks with you, but the truth is from a practical. Side of this. If you can have an amicable discussion and say, listen, you claim the one this year, you claim the children next year. As long as two people aren't claiming the same child is never going to be issue.

17:49 Now that said. I've dealt with many situations where both parties tried to claim the kids and it becomes a contest of seeing who can get to the filing first. So don't let that happen. have a discussion, talk about this. there's so many things that can be resolved in this. If you'll sit down and just have a conversation, and this leads me back to a few final action steps. And that's a document. Everything. In this situation where you're trying to figure out who's going to claim somebody and it becomes ugly. And you're going to have to battle this out with the IRS. you've got to prove the exact number of nights that children live with. You. If the custody is 50, 50, or close, this matters greatly and the IRS. so basically here's the way it plays out. Parent a comes in, gets their taxes done and claims the children.

18:31 If they file electronically. It's great. It goes right through. I would say a couple of weeks later, parent B comes in and get their taxes. done immediately come to the same person, but they go somewhere, get their taxes done. And they tell their tax advisor account. No, I'm going to claim the kids. And let's say they file electronically. Then what happens is they filed that return electronically. it gets rejected. The IRS says whoa, wait a second now. Someone's already claimed these children. So you get that call from your tax advisor. It says, oh, you know what? Mrs. Jones, We tried to fail your return electronically. And all of a sudden it got rejected because someone else has claimed her children. And then of course, then the battle starts. Oh that no good. You know? I can't believe he did that, or she did that.

19:12 But then you got to document this. So what you're going to end up doing from a practical standpoint, you're going to paper file your return, which means you're gonna be waiting for a refund. If you're getting one. And eventually you're going to get this letter from the IRS that says, Hey guys, we see you both claimed. These choose the same child. Let's prove this. That's why I'm saying the negotiation to this is so much easier, but if you can't negotiate, then document everything, Get a calendar out and figure out, which nights the children were with you. What expenses you are pay for? And people ask me all the time, do they really want receipts? Yes. They really want receipt. You're going to have to prove grocery bills. You're going to have to prove clothing bills. You've got to prove all those things. So keep track of those expenses. I know it's a huge burden. But it's going to pay off in the end.

19:53 So the key to this. Is making sure that you document everything. Now we've covered a lot. Let me just do this. Let me take a few moments and just, We got a couple emails from clients or people who listened to the show and they said this. So Sarah writes. My husband insists on keeping the house, but I can't afford the mortgage alone. Am I stuck? Well, Sarah, we kind of talked about this. But you got to look at the numbers, not your emotions. Ask yourself, a couple of questions, can the house be refinanced under just your name? We talked about that. Could selling it and buying something smaller, be the wiser long-term, maybe you make a clean split, you sell and, each of you by your own homes. But don't be afraid to ask for temporary support from the family. if it bridges a gap to financial freedom, ask for help from your parents, ask for people around you to get you through that tough time.

20:38 You got to avoid letting fear, push you into a solution that traps you for years to come, don't make. short-term decision. That's going to have long-term consequences. We got another email from mark. He says my soon. X, two B as he calls it, hides her income. How do I get a fair settlement? If she's lying about earnings? Well, Mark this happens, dude. It's the truth. if you've got an attorney or your attorney might consider hiring a forensic accountant, done some of that work. You think of them as financial detectives, they can track down hidden assets. not everybody's honest, mark, that's just the truth. It's an expense to hire somebody like this, but it could save you vastly more. If it prevents you from being cheated, it's overwhelming.

21:20 Finances during divorce feel like a double burden, but knowledge is power. Surround yourself with wise counsel, both legally and financially cling to your faith. this is going to be a time when your faith is going to be tested. It's a time when, if you make your faith strong, it will work. You'll be able to rebuild. Even if it doesn't look the way you pictured it at the time. You can persevere. Now I know we've covered a great deal today. I'm going to encourage you to go to askralphpodcast.com and share your story. It might be just the encouragement someone else needs. And while you're there, make sure you join our email list. We're doing a $25 Amazon gift card giveaway every week. You can also schedule a consultation.

22:00 Me, like we talked about. If you need somebody to help you on the financial side of this, I'm not an attorney. I don't give legal advice. But I can certainly help you on the financial side of this, Help you navigate the tax consequence, help you create a new budget, that sort of thing. share this episode with others who might be going through a divorce. Encouraed them to reach out to me if they need further assistance. I look at my mission here to help others. This is a difficult topic. You can tell by my tone of voice, that this is not an easy thing to talk about, but it's something we needed to talk about. So I hope this has been encouraging for you. I hope it's giving you practical advice. And if it has share it with somebody. my goal is to grow audience so that I can help more people. So tell somebody, tell a friend, tell a family member.

22:42 And remember folks, as I always say, stay financially savvy. And during these difficult times, may God bless you abundantly. You will persevere. You will see a new season in your life.