For many families, the future cost of a college education for their children will overshadow all other childhood expenses. So this is an important conversation for parents whether they are married or divorcing. In the circumstance of divorce mediation, my role is to place the topic front and center for discussion.
In the circumstance of divorce mediation, my role is to place the topic of financing your children’s college education front and center for discussion.
In my view, financial decision-making involving college education costs centers around three topics.
Saving for Future College Expenses
According to U.S. News & World Report, the average cost for tuition and fees alone for the 2020-21 academic year was $41,411 at private colleges and $11,171 for in-state residents at public colleges. This does not include room and board and other expenses, such as travel and books. For a four-year education, the price tag is substantial.
Where resources allow, many families will commit to a savings strategy for college. Many take advantage of 529 college savings plans, which allow for the earnings on savings to be tax-free as long as these funds are used for qualified educational expenses. For families who expect to qualify for financial aid, maintaining a 529 account may result in a small reduction in a future financial aid package.
Divorce mediation involves planning for the future of two separate households, so a college savings plan—when feasible in light of other expenses—will form an important component of the overall parental financial plan.
Parental vs. Student Financial Responsibility
Each family is faced with a decision that revolves around how much of college should be paid for by parents and how much by the child who is attending college. In my experience, there are many factors that may influence these decisions:
Allocating the Parental Contribution to College Costs
Once parents have determined how much they are willing/able to spend for college education, they must also decide how to split the cost. This may create discomfort, as there can be uncertainty about future resources that makes parents reluctant to commit to future expenses at the time of their divorce. When parents are able to make the commitment, other issues that need to be addressed will include how existing parental savings will factor into this split and how income and resources will affect the split.
Watch for the next post, where I will share alternative methods within mediation for approaching these important decisions about financing a college education.
As the tax filing deadlines approach, many of us are encouraged to think about tax planning for the year ahead. No matter what time of year it is when you are facing divorce, it’s the right time to think about taxes.
Your filing status will change in the year of your divorce, and this change will affect the entire year. So even if your divorce isn’t finalized until later this year (for example, in September), your new filing status will be in effect for all of 2021, and this will be your filing status when you file your taxes next year for 2021.
While you are married and filing joint returns, it’s very possible that a lot of taxes are withheld from one spouse’s paycheck but much less from the other’s pay. Since this is all added up at tax time, the net result may be fine, in that no taxes are owed or there may even be a big refund. But what happens now, if you are the person who did not have much taken out of your paycheck?
Here is an example:
John and Susan are getting divorced. John’s gross income is $100,000 per year ($3,846 biweekly). John has federal taxes withheld based on being married with two children claimed as dependents.
Based on the IRS Federal Tax Withholding Tables, John would have $175 in taxes withheld from each bi-weekly paycheck for a total of $4,550.
When John files his taxes for 2021, he is now filing as a single taxpayer, and he and Susan have agreed to each claim one child as a dependent.
John takes the standard deduction, since Susan is keeping the house and paying the mortgage, so he doesn’t have enough deductions to itemize.
And based on the tax rates for single taxpayers, and even with an increased child tax credit for 2021, John’s federal taxes will be $12,067, meaning that he will owe the IRS $7,517!
It’s essential to plan for the tax changes that will happen when you are getting divorced.
Now, this may be an extreme example, as perhaps John was having extra money withheld voluntarily from his paycheck. But the lesson to be learned here is that it’s essential to plan for the changes that will happen when you are getting divorced.
If you are getting divorced, this is what you can do NOW:
Using my skills as both a divorce mediator and experienced finance professional, I will help you think through what lies ahead, including how your tax situation may change and what steps to take to prepare.