Finances and Divorce: Key Financial and Tax Considerations
Divorce is not only an emotional and legal transition—it is also a major financial event. Decisions made during a divorce can have long-term tax consequences that impact your income, assets, and financial stability for years to come.
At Lauren Pevehouse Law, we help Minnesota clients navigate divorce with a clear understanding of both the legal and financial implications. Below are key tax considerations to keep in mind as you plan for life after divorce.
Filing Status After Divorce
One of the first tax-related questions following a divorce is how you will file your taxes.
Your filing status is determined by your marital status as of December 31 of the tax year. After divorce, you may be eligible to file as:
Single
Head of Household (if you qualify)
Married Filing Separately (if divorce is not yet finalized)
Choosing the correct filing status can significantly affect your tax liability, deductions, and credits. Head of Household status, in particular, can provide favorable tax treatment if you meet the IRS requirements.
Child Custody, Dependents, and Tax Credits
The IRS has specific rules regarding which parent may claim a child as a dependent. In most cases, the custodial parent—the parent with whom the child resides the majority of the time—has the right to claim the child.
However, Minnesota divorce agreements can allocate this right differently. Your divorce decree should clearly address:
Who claims the child as a dependent
Eligibility for the Child Tax Credit
Allocation of education-related tax benefits
Clear language in your divorce agreement helps prevent future disputes and IRS complications.
Child Support and Spousal Maintenance (Alimony)
Child Support
Not tax-deductible for the paying parent
Not taxable income for the receiving parent
Spousal Maintenance (Alimony)
Under federal tax law changes effective for divorces finalized after January 1, 2019:
Spousal maintenance payments are not tax-deductible for the payer
Spousal maintenance is not taxable income for the recipient
Because older divorce decrees may follow different rules, it is important to confirm which tax treatment applies to your case.
Division of Assets and Tax Consequences
In a Minnesota divorce, marital assets are divided equitably—but not all assets are taxed the same.
Some assets may appear equal in value but have very different tax consequences, including:
Retirement accounts
Investment portfolios
Real estate
Business interests
Understanding the after-tax value of assets is essential when negotiating a property settlement.
Capital Gains Tax and Property Transfers
Transfers of property between spouses incident to divorce are generally not taxable events. However, future sales of those assets may trigger capital gains tax.
For example:
Selling a home after divorce
Liquidating investment assets
Knowing the tax basis of assets you receive in a divorce is critical for long-term financial planning.
Retirement Accounts and QDROs
When dividing retirement accounts such as 401(k)s or pensions, a Qualified Domestic Relations Order (QDRO) is often required.
A properly drafted QDRO:
Allows retirement assets to be divided without early withdrawal penalties
Prevents unnecessary tax consequences
Ensures compliance with both federal law and plan requirements
Mistakes in this area can be costly and difficult to fix later.
Health Insurance Considerations After Divorce
If you were covered under your spouse’s health insurance, divorce may require you to secure new coverage. Options may include:
COBRA continuation coverage
Employer-sponsored insurance
Individual marketplace plans
Health insurance costs should be factored into your post-divorce financial planning and any spousal maintenance discussions.
Why Legal Guidance Matters
The intersection of divorce, taxes, and financial planning is complex. Decisions made during your divorce can affect your tax liability, retirement, and long-term financial security.
Working with an experienced Minnesota divorce attorney—alongside a qualified tax professional—can help ensure that your legal agreements align with smart financial planning and avoid unintended tax consequences.
Speak With a Minnesota Divorce Attorney
The best way to understand how divorce will impact your taxes and financial future is to speak with an attorney who understands both the legal and practical implications.
Lauren Pevehouse offers confidential consultations to help clients make informed decisions during divorce.
📞 Call (651) 800-1030 to schedule a consultation with Lauren Pevehouse Law, or contact us online to get started.
