Money Monday: Financial potholes to avoid during divorce

Divorce can take an emotional toll, but for many, it can also become a financial disaster if handled poorly.

On this Money Monday, CPA and money expert Paul Hood shared his advice on what to avoid when separating finances during a divorce.

Financial mistakes that could cost you in divorce

“Obviously if you don't have to, don't do it. I do believe in the biblical definition of marriage, but I had a very wise person tell me a long time ago that typically when you go through a divorce, husband gets third, wife gets third, the attorneys get a third. It's not a good financial plan.”

Hood outlined 3 key financial issues people often overlook:

1. Know the difference between alimony and property settlement

“The biggest thing is, as used to, alimony was taxable. It's not anymore, but it can be changed. And so, property settlement's usually fixed. Alimony, depending on what side, it's good or bad, it can be changed.”

2. Understand child-related tax deductions

“A divorce decree can say, you know, the spouse one gets to deduct the kids. Well, the IRS doesn't care about that. They don't care about the divorce decree. They care about custodial parent. A custodial parent is whoever has the kids the most.”

“So you literally can have this friction between the IRS says, you know, the wife can claim them because the kids are with her more, but the divorce decree says the husband gets it. So the wife has to sign a piece of paper to allow the husband to do it.”

3. Handle retirement account splits correctly

“A lot of times in property settlement, there's a retirement plan that gets divided. And if, say, the wife has a big 401K and she takes money out and gives it to the husband, the wife has to pay taxes on it, even though he got it.”

“So you want to make sure you do what's called a qualified domestic relations order, which the court orders the money to be given to the husband or the spouse, and they can put it into their own IRA. So there's a big, big, big tax savings for doing that.”

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