Could a Divorce Improve Your Finances?

by Xin Lu on 2 April 2008 18 comments

When I was single, I thought that getting married would reduce my expenses greatly, and after I got married I realized that in some instances married life is actually more expensive . In general, divorces are extremely costly and detrimental events, but ironically there are so many laws pertaining to marriage and finances that could make a divorce financially advantangeous for a committed couple. Here are some of the bizarre examples I have read in the news recently.

  • Couple considers divorce to avoid Alternative Minimum Taxes - Our convoluted tax code puts many people in a higher tax bracket once they tie the knot. The Alternative Minimum Tax or AMT for short is a tax system that disallows many deductions allowed in the regular tax system so many married couples with children are affected by it. In this particular story the couple are not divorcing each other, but if they did they could save over $20,000 a year on taxes.

These stories are interesting because the couples are not the typical golddigger or hollywood star who sheds marriages like dandruff. They are actually people who want to improve their marriage through a legal divorce. It is pretty oxymoronic, and it could be said that these people are abusing the system by getting a divorce, but why are the laws concerning taxes and various benefits so different between married and single people that such situations arise?

What do you think? Would you get legally divorced to financially benefit your family?

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Guest's picture
Christine

Wow that is amazing... and so very true. I am kinda scared to get married because of all the money I am going to pay in taxes. Although me and my boyfriend make almost 65,000 combined (haven't really looked at how close I am at moving to the next tax bracket) when we get married eventually, we will definitely be making more as that will be in 5 or 6 years (i hope).

Guest's picture
Wesley

Nice article, I never really thought about people being punished for their convictions in being married...such a shame. Makes you wonder who comes up with these taxes and for what purpose?

Guest's picture
Curt

The financial benefits of marriage far out way the negatives.

Such as:
- One house vs. two
- No child support paycheck deductions
- Half the Christmas/b-day presents
- Two people budgeting together can out think one
- More money can be put into retirement planning
- You can subsidies each other through college
- You can start and grow a business together, providing more income and a better tax shelter

Guest's picture
yogaman

. . . when you can do all the things you are talking about by living together without being married. If that offends you ethically, then we need to stop punishing people for being married.

Xin Lu's picture
Xin Lu

yep, there are a lot of financial benefits, but I am asking if that  is a good reason for the tax laws to penalize married people? I do not support divorce, but I think the legal side of marriage is kind of convoluted.

Guest's picture
tracyho

Sharing responsiblity & enjoy life & parnership of almost everything ...........During Happy time

Divorce meant split your love , money whatever which previously share too bad , we married not for money but love I pressume !

I hope not to reach that stage , till die we part ,

All the best guys ,

Tracy Ho
wisdomgettingloaded

Guest's picture

@ Curt,
She's not crazy. She's talking about legal divorces where couples still stay together. The benefits you mentioned are still available to cohabitating couples.

I, for one, am happily married and I like the legal protections that go along with the piece of paper, but sometimes it does feel like there's a huge hidden cost to that legal validation.

I can't recall anyone I know divorcing to save money, but I have seen plenty of couples stay unmarried (at least in the legal sense) because they knew that getting legally married would mean that they'd lose too much needed money for college scholarships or government aid like healthcare. I think people are more tolerant and understanding nowadays, but they still get people pestering them about when they're going to get married.

Guest's picture
jared

This is actually something that really affects me. Several of my couple friends are not married because of financial reasons. They are in long term committed relationships, live together, some even have kids. However, getting married would be financial suicide. Particularly in an unforgiving tax state like New Jersey. My wife and I have discussed it. Currently our savings would actually be minimal, but if it increases we may seriously consider it. We would still be in a committed relationship; but we'd be divorced on paper.

I've thought about this long and hard and I wish that the tax codes for Fed and State would reflect actual hourly rates instead of overall AGI. The tax code punishes hard workers as well. I've thought about getting an extra job, but after doing the math, it would barely pay to get a side job paying anything less then $20/hour (unless it was under the table). If your tax rate was the total amount of income divided by the number of hours you worked it would be more fair. Particularly for married couples. Take your combined income and divide by your combined hours work and figure the tax rate on an hourly basis.

A prime example of unfair tax rate was last year when the state of NJ issued property tax rebates. If I earned $8 less in interest on a savings account or $8 less in any way at all, I would have received $500 more back from the state in the form of property tax rebates. If my wife and I where divorced and filed separately it would have even been better. How unfair is it that $8 more in income equates to losing $500 in returned taxes?

The tax system is stupid. It screws the middle class.

Xin Lu's picture
Xin Lu

@Meg

Yes, scholarships is another thing that screws people over. Just because two students are married it doesn't mean they have more income. It's pretty silly. I just think that each individual should be treated equally by the law regardless of marital status. Marriage really should be a personal matter.

@Jared

I feel your pain.  I feel like the entire tax code is very anti-women because a second income is penalized heavily.  I'm not even a feminist, but I feel that it is made to keep women home.   

Guest's picture
Hannah

My parents' divorce definitely helped my mom's finances... though it wasn't tax related, it was more so that it stopped my dad's arbitrary spending!

Julie Rains's picture

Divorce, from what I have heard, can often be financially devastating -- especially for the spouse/partner who may have been pursuing career interests that were not as lucrative as possible, for the sake of the marriage and children.

I have heard from my parents, though, of older couples (widowed, in their 70s and 80s) ) who now have partners but opt not to marry because of potential financial losses associated with social security, pension payments, etc.

Guest's picture
Sara

I too am nervous about getting married because I am pretty sure that will throw us into AMT. If separately we pay plenty of taxes (and believe me, we do), why on earth should we have to pay more together??? We live together now and share fiances, so there is really no need for us to marry except for pressure from family and society.

Guest's picture

This is really crazy my neighbors are in the same situation. I know a couple that will not get married for the exact same reason as the Man who divorced his disabled wife. The girlfriend receives Medicaid and has extremely expensive Doctors bills every year and if they were to get married she would lose her insurance and the boyfriends isn't as good as hers. They would literally go bankrupt if they got married.

Guest's picture
Guest

Statistically, in 1/3 of households the wife earns more than the husband. This may sound strange but I have a few friends who have divorced and are quite happy with the outcome. Their husbands were a drain financially and in the end, separating the finances worked out for the best! Guess the coin turns both ways nowadays!

Guest's picture
Timmaay

I went from living paycheck to paycheck with no savings and tons of debt to a 2008 Lincoln MKZ, 2007 Honda VTX1300R and money in my savings account and 401K in just two years...all by getting divorced. And this in spite of spending $15K on the legal process AND with my child living with me (I have residential custody). Did I flip houses? No. Buy Donald Trumps book? No. I just lost 150 pounds of dead weight...every time I earned a nickel, my wife spent a dime. Nothing improves your finances like patching a hole in the leaking bucket of money. If your "partner" doesn't produce any income, but loves to throw yours away...you have only one (legal) option.

Guest's picture
yoyo

By getting divorced, I rid myself from a 230 pound man who ruined my credit and left me with debts. It has taken me years to recover from this financial disaster. My recommendations: Do not marry and make sure that this person does not convince you to use your credit to purchase items for him/her because his credit is shot and tries to convince you that he/she will make the payments. You will end up cleaning up the mess. After we divorced, I couldn't even cosign for a student loan for my son. As you can see, our children pay the consequences also.

Guest's picture
Guest from WA state

My husband and I are deeply in love with eachother, we have two beautiful children together. We rarely argue... we "discuss" anything that is ever an issue. We're responsible adults and parents...

long financial downward spiral story shortened - since we married 3 years ago, our finances have been a disaster... we've lived together and had our finances combined for 7 years total. Marriage accomplished one possitive thing for us... it showed the holy union of our devotion to eachother in front our family and God. however, we married in a courhouse, to save money, no lavish wedding expenses what-so-ever. We're not spenders... we're practical penny-pinchers... yet we are payday to payday based on some medical issues w/ one of our two children, a loss of a job a few years ago, and having to utilize all savings to get through it all, not to mention a disasterous money-pit house we bought a few years ago to remodel and sell... we modestly remodeled it and we finally sold-it... didn't make a penny as we sold it one year ago, bad timing w/ the economy. We're renters now and have basic utilities. No credit cards any more... just a lot of debt incurred from the circumstances listed above...

Our moral and ethical backround is that of people 100 years ago... we're a very conservative couple grounded in our religious beleifs... but there's a 'but'...

Next month... December 2008, our Christmas present to eachother is going to be a divorce... on paper... legally... but NOTHING else will change... our love for eachother and our children stays the same... our living arrangements stay the same... our family and friends and especially our children will not know that we've 'divorced'... nothing is going to change EXCEPT our finances... for the better. And this will be in many aspects...

we have so much debt that we would really like to go bankrupt, as much as both of us are against bankrupcy it's our only option... unless we were willing to live in our car for about 10 years... our financial disaster will be with us until death do us part... left for our children to inherit... I do not want our children to inherit a financial disaster that was brought upon their parents in their mid 20's due to unexpected circumstances... we've done everything 'right'... so why has it come to this point? We tried hashing out the 'why'... it goes no-where, the 'why' for us has been unexpected circumstantial event after event after event... which has put us deeper and deeper into financial turmoil...

there's a catch to bankrupcy though... my new career will abruptly end if we go bankrupt. If my husband and are 'divorced' he can go bankrupt without my ccareer being jepordized as our credit will no longer be 'combined'. Most of the dept is in his name so this will really help the cause.

There's many more aspects that will help financially as well. I will go on state aid for daycare and food assistance for 6 months to a year, to in-turn use the extra available money to pay off my debts. With my husband going bankrupt after we 'divorce' his extra money will catch up our rent and utilities and then go to savings and retirement funds. We will however most likely re-marry once we've regained our financial stability and savings... however the possibility reamains that we could remain 'divorced' for the long-term tax break. I will be receiving a guarenteed pay increase in just less than one year and I will also be done with school... this is where I will also not have to utilize any further state assistance.

In five years I will be making enough that my husband could stay home or work part-time, plus our youngest will be in school and that means no more child-care costs...

We have written out our VERY detailed financial plan for the next five years and through retirement. The 'divorce' aspect will reverse the speeding train and get the ball rolling in the right direction.

It's sad that taxes and expenses in which the government and society have created do not fully support the traditional marriage... they punish us for having values and morals and wanting to be a traditional 'family'. They make life much easier for the 'broken' and non-traditional family... it's so backwards....

Enough stated.

Guest's picture
Guest

Where to begin I got sick 3 years ago not sure what happened but it devistated my life I had a Salon and ran a Plumbing Business and when I got sick I could not even balanced a check book. My husband saw what was happening and wanted to save himself so he went behind my back and got divorce proceedings started I found out accidently he said it was on paper only and that the state could take care of me and I could file bankruptcy and then later he would remarry me well it was not on paper only and it eneded up in our paper and all our friends and family saw it and he never got me the bank ruptcy or a paper stating he would leave everything to me when he passed on. I did not want a divorce and it mind blanked me to me he took my idenity away my independence my credit screwed because he stop paying my bills and credit cards and he said he did it all so I could get state aide that never happened he pays my insurance premium so really what did this do for us. I turned to a dear friend and became intimate with him and now Im being austrciesed by family and friends Im lost I live with the Ex but I want out how can I. I have nothing since I got sick I had to close the Salon and have no income . I have been with this man 16 years married 8 never in a million years would I have thought he would do this to me. Help anyone what can I do to better this situation.