One of the reasons many people hesitate to get divorced is that getting divorced isn’t cheap. But while everyone knows that divorce lawyers are expensive and that it takes more to support two households than one, most people vastly underestimate what divorce really costs. Why? Because there are hidden costs of divorce that most people don’t think about.
Divorce is a huge step, and I’m not encouraging anyone to jump into it unless they have thought long and hard about their decision. But, in order to make the best decision possible, it is absolutely essential that you understand the true cost of divorce. That means that you have to think about the top five hidden costs of divorce.
The Hidden Costs of Divorce
The two most important types of taxes that people fail to think about when they are getting divorced are income taxes and capital gains taxes.
Income Taxes – The tax laws favor married people. If you file your income taxes as married filing jointly, you will usually pay the least amount of income taxes. Once you divorce, you must file your income tax return as a single person. That typically means that you will automatically pay income taxes at a higher rate than you did when you were married.
Of course, the total amount of taxes you pay also depends on how much income you receive and how many exemptions you can claim. When you are married, all of your and your spouse’s income and exemptions get claimed on one tax return. Once you are divorced, you and your ex have to divide those exemptions. (You can’t both claim the same exemptions.) What’s more, income paid to one spouse as alimony is typically tax deductible to the payor and taxable income to the payee. So the payment of alimony has tax implications for both you and your spouse.
Figuring out the income tax implications of your divorce can be both incredibly complicated and incredibly important. Do it wrong, or don’t do it at all, and you may be socked with a tax bill that sends your budget reeling!
Capital Gains Taxes – Dividing investments in a divorce can also be a source of one of the hidden costs of divorce. If you and your spouse own any stocks and bonds, and you sell all or part of them so that you can divide them up in your divorce, you may be facing capital gains taxes. If those assets were a part of a retirement account, and you leave them in the retirement account, you may not have to worry about capital gains tax, but if you withdraw the money from your retirement account to live on, you will likely get hit with capital gains taxes (unless the account was a Roth IRA).
The Bottom Line: Taxes are complicated and confusing. They are one of the biggest hidden costs of divorce. So, before you finalize your divorce case, you should consult with a qualified accountant or a certified divorce financial planner and make sure that you know what you will really face in taxes after you divorce.
2. Real Estate Expenses
If you have to sell your house because of your divorce, you will get stuck paying the realtor’s fees, closing costs, and potentially capital gains taxes on the sale. You also may get less for your house than you think it is worth if you are forced to sell it in a bad market.
If you don’t sell your house, and one of you keeps it and buys out the other, then one person alone will someday have to pay the realtor’s fees, closing costs, and capital gains taxes from the sale. What’s more, depending upon when you plan to sell your house, you may not be entitled to get credit from your spouse for all of these costs at the time of your divorce. While this is an issue you may be able to negotiate with your spouse, at the very least, you should consult with an attorney in your area about this issue.
The Bottom Line: Don’t forget to factor in the costs of selling your house into your divorce. If you or your spouse is keeping your house, check with an attorney to find out whether the spouse who is keeping the house can get credit from the other spouse for the costs of the sale. Finally, remember that everything is negotiable.
3. Employment Costs
It costs money to get a job! If you have been out of the workplace for awhile you may have to pay to take some additional courses, or get marketable training to improve your resume or your skills. You may need career counseling. You will need to have a wardrobe you can interview in. You may also have to travel for interviews. All of these things cost money. They are truly hidden costs of divorce.
The Bottom Line: When you are making your post-divorce budget, make sure to factor in enough money to pay for all of the “extras” you will need in order to find a job that can sustain you.
Divorce takes a huge emotional toll on everyone involved in the process. It is hard on you. It is hard on your spouse. It is hard on your kids. While, hopefully, everyone will be able to adjust at some point, it is totally normal for you and/or your kids to need help from a licensed therapist, counselor or divorce coach for awhile. Even if you are hesitant to spend the money on therapy, or you don’t think of yourself as “the kind of person who needs help,” divorce is different. There is no shame in getting the help you need to get you through this difficult time and put your life back together.
The Bottom Line: You need to factor into your post-divorce budget the costs of getting whatever therapy, counseling or coaching that may be necessary for you and for your kids.
5. Increased Costs of Health Insurance
When you are married, you, your spouse, and your kids typically share one health insurance policy. Once you are divorced, that ends. That means that you and your spouse will each have separate health insurance policies, and somebody is going to have to insure the kids. Even with the changes to the healthcare laws, unless you and your spouse are each able to get health insurance through your respective employers, you are very likely going to collectively end up paying more for health insurance than you did before your divorce.
The Bottom Line: The best time to figure out your healthcare options and the cost of those options is before you get divorced. If you don’t have access to health insurance through your employer, make sure to do your homework! Find out what your health care will cost after you divorce, and make sure to work that into your post-divorce budget.
The Total Bottom Line: Before you dive into a divorce, and before you finalize your divorce, make sure to take into account these hidden costs of divorce. Otherwise, you may suffer a financial shock you truly were not expecting!