Gray Divorce: 10 Financial and Tax Issues You Must Know After 50

Are you in your 50s or older and facing a divorce?

The emotional and financial impact of a “gray divorce” can be overwhelming. Beyond the emotional strain, managing your finances is critical. The first step is hiring an experienced divorce attorney. Although it might be tempting to avoid legal fees, going without professional guidance could cost you more in the long run. Additionally, understanding the key financial and tax issues that come with gray divorce is essential. Consulting a CPA and financial planner can help, but here are the basics that anyone going through a gray divorce needs to know.

Top 5 Financial Issues of a Gray Divorce

1) How to Budget After Divorce

The cash flow you had while you were married supported one household. After a divorce, that available income stream will need to fund two households. Unless you’re wealthy, this could be very problematic. At best, you can expect your income to be cut in half. Granted, you only have to cover your own personal expenses, but some expenses, like housing, insurance, and medical expenses, could exceed 50% of your married costs.

Start with calculating a spending budget. It won’t be perfect, but it’s a starting point. To begin, itemize your fixed costs. These can include rent, car payments, insurance, groceries, and utilities. Your variable (flexible) expenses, such as travel, restaurants, and gifts, can be adjusted based on your available income. As your postdivorce lifestyle becomes more certain, you can revise that budget.

2) Selling the House and Downsizing After Divorce

After a late-life divorce, you might be thinking that you’d like to keep the family home. This could be a double-edged sword. Keeping all the equity in the house means you’ll get less of the other assets. Also, the cost of maintaining a large home along with assuming a mortgage could squeeze your budget. Do you really want to be house-poor to keep a residence that might be too big for you? Of course, there are plenty of considerations to think about:

• Could you handle having a roommate for the benefit of rental income?
• Are you thinking about moving to a different city?
• Would the flexibility of renting better suit you?
• Would a condo be more fitting for your new lifestyle?

3) Social Security Divorce Benefits

If you were married at least 10 years, your Social Security benefit will be the greater of your own benefit or half your ex-spouse’s benefit. Certainly, if this makes a difference for you, consider the timing of your gray divorce. For example, if you’ve been married for nine and a half years, you might want to delay the final decree for six months.

Additionally, if you are approaching age 62 (or older), you have a choice of taking benefits early for less of an ongoing monthly benefit or delaying to increase your monthly benefit. Your personal financial situation and life expectancy will be the primary decision-making factors.

4) Working After Divorce

If you will be short on cash flow, returning to (or continuing) work might be a good solution. Depending on your shortfall, it might not be necessary to hold down a high-level full-time job. Many semiretired people supplement their income with substitute teaching, house- and dog-sitting, and other part-time work. Whether you continue your regular job or pursue something less demanding, there’s a big advantage to bringing in income: You might be able to delay drawing from your investments.

5) Long-Term-Care Insurance After Divorce

When you are on your own, long-term-care coverage is important. This insurance will be less expensive and easier to obtain when you are younger (under age 60) and healthy. If you’re not able to afford premiums, consider opting for a longer waiting period of 180 or 360 days. Paying for long-term care for six months to a year can be more easily handled than having to cover care for many years.

There are two other options for covering long-term-care costs. Do you have an old cash-value life insurance policy? In many cases, you can exchange the life insurance policy for a long-term-care policy. Second, consider moving into a “continuing care” retirement community. As an active senior citizen, you can choose independent living, which is similar to having your own apartment. As you age and require more care, you can move to assisted living, healthcare, or memory-care facilities within the community. Look for a community that is nonprofit and will cover your care even if you run out of money.

Top 5 Tax Issues of a Gray Divorce

1) Tax-Filing Status

When you were married, you likely took advantage of the beneficial married-filing-joint tax rates. When you are divorced, you will pay tax at the single rate (or the better head-of-household rate if you have a qualifying person living with you). If you are married and want to file separately from your spouse, your only option is the costly married-filing-separate rates. To avoid this, be aware of how the IRS treats your marital status. If you are married on Dec. 31, you are treated as being married the entire year. If you are divorced by Dec. 31, you are treated as being single for the entire year.

2) Divorce Splitting Assets

Splitting assets means each spouse gets a share of the joint assets. From a tax standpoint, the basis of each asset is transferred to the recipient. Beware of receiving a disproportionate share of low-basis assets. For example, say that Pat and Terry jointly own cash of $1 million and a stock portfolio of $1 million with a tax basis of $400,000. If Pat receives the cash and Terry gets the stock portfolio, Terry will be subject to tax on the $600,000 gain if the portfolio is sold. Thus, an equitable division would be to split both the cash and the portfolio.

3) Spousal Support

Besides splitting the assets, there’s the issue of support. If your spouse has substantially more assets or earns more than you, you might be entitled to monthly support payments (alimony). In the old days, these payments were deductible by the payer and treated as taxable income to the recipient. Current tax law makes these payments nondeductible to the payer and nontaxable to the recipient.

4) Retirement Accounts

Retirement accounts, such as 401(k)s, have a zero-tax basis (with the exception of post-tax contributions). Upon taking withdrawals, 100% is subject to ordinary tax rates—plus a 10% federal penalty for withdrawals before age 59.5.

Be warned: When splitting retirement accounts, tax can be triggered unless the division is done through a legally documented qualified domestic relations order.

5) Selling a Home

Often, divorcing couples need to sell their home. If you sell the home while you are married, under current tax laws, you can exclude up to a $500,000 gain as long as you’ve lived in and owned the home for at least two of the past five years. If you take ownership of the home and decide to sell it later, your gain exclusion is only $250,000.

Employ a Professional Team for a Gray Divorce

If this seems like a lot to deal with, it is. Anyone approaching a divorce—especially a gray divorce—needs to have a solid professional team to rely on. Engage a qualified attorney, CPA, and financial planner to ensure your financial future is protected.