Divorce is as much a logistical effort as an emotional one. Besides the challenges like figuring out how to break the news to friends and family or how to help your child through the transition, you also have numerous practical elements to work through.
One of the most important? Financial issues—and there’s a lot to unpack here. While you’ll need to work out everyday questions like who gets the furniture, there are more complicated, nuanced questions to resolve.
Five financial issues you might need to consider during divorce
1. Alimony
Also known as spousal support, alimony is a financial agreement in which one spouse provides for the other during or after a divorce. The goal is to maintain the receiving spouse’s standard of living while they establish their own financial stability.
Alimony isn’t one-size-fits-all. The type, amount, and duration vary widely depending on each couple’s circumstances. The main types of alimony are:
- Temporary (also known as pendente lite). Awarded during divorce proceedings, typically short-term if one spouse has been financially dependent on the other. It can be modified or terminated once the divorce is final.
- Limited durational alimony (term alimony): If the recipient is anticipated to become self-sufficient in the near future, term alimony can allow for financial support during this transitional period so they can maintain their standard of living. This type of alimony typically does not last longer than the duration of the marriage and may often be less than the length of the marriage, depending on circumstances..
- Open durational alimony: This type of alimony creates ongoing financial support for spouses leaving long-term marriages. In these situations, the receiving spouse may have spent years as homemakers or out of the workforce, making it unlikely that they would maintain the standard of living enjoyed during their marriage.
- Rehabilitative. Supports one spouse in pursuing training or education to achieve financial independence by pursuing vocational or job retraining. Rehabilitative alimony is generally provided for a set period of time, though may be extended if necessary.
Receiving spousal support hinges on several factors, including the receiving spouse’s financial need, the standard of living during the marriage, and earning potential post-divorce.
Keep in mind that there have been recent changes in how taxes and alimony interact because of the Tax Cuts and Jobs Act. For those paying alimony, these payments are no longer tax deductible at the federal level. On the flip side, if you’re receiving alimony, these payments don’t need to be reported income at the federal tax level. State taxes may still apply. These changes in the tax landscape should be considered as you navigate financial negotiations during a divorce.
2. Selling your home
Deciding what to do with your marital home is one of the biggest decisions during a divorce—and it’s not easy to make. In addition to the logistical and financial factors, your home can also carry strong emotional attachments.
If one spouse keeps the house, it becomes part of a broader division of assets, including retirement accounts and investments. Under equitable distribution, this might involve a buyout, requiring a careful look at the home’s value and outstanding mortgage obligations.
When both names stay on the mortgage, it’s not just about negotiating who gets the deductions; it also affects both spouses’ credit scores and borrowing capacity.
If the home is sold and has significantly appreciated, capital gains taxes come into play. As of 2024, the IRS allows a $250,000 exclusion on capital gains for single filers and a $500,000 exclusion for married couples filing jointly if the home was a primary residence for two of the last five years.
This means that capital gains may not be an issue depending on the change in value of your property since purchase.
3. Dissolution of a business
Co-owning a business with your soon-to-be ex—whether as the financial backer or operational driving force—means confronting challenges and working together for the sake of the company. In some situations, it may be possible to consider a business partnership after a divorce. In others, however, it may not.
If you fall into the latter camp, there are a few things to remember. Determining ownership and control can be tricky for a jointly owned business. Good record-keeping and a clear understanding of your contributions can make valuing and dividing the business go more smoothly.
However, dissolving a business can make it more difficult to start future ventures. Challenges like damaged credit scores, decreased borrowing capacity, outstanding liabilities, and potential regulatory restrictions can arise.
As you weigh your options, it can be helpful to think outside the box. Consider selling, teaming up with a new partner, or using mediation to find other workable solutions.
Of course, there are tax implications involved in dissolving a business. Whether it’s a capital gains hit or additional tax penalties included due to a changing business structure, your best bet is to consult a tax professional, financial advisor, and tax-savvy attorney.
4. Retirement accounts and pensions
For many families, retirement savings and pensions may make up a substantial portion of marital assets. However, dividing them in a divorce often requires additional legal steps.
These accounts were built to safeguard your financial future, so take the time to understand the tax implications of early withdrawal or mishandling the division. An unexpected tax bill can disrupt even the best-laid financial plans. Make sure you know the long-term implications and consider consulting a financial advisor.
One strategy for handling the division of retirement accounts is a Qualified Domestic Relations Order or QDRO. A QDRO is generally needed to inform the plan’s administrator how and when to distribute assets. This document outlines who is entitled to the funds—if it’s solely the earning spouse or if the non-earning spouse is entitled to a portion, and if so, how much.
If the QDRO states that only the earner is entitled to the funds, they are solely responsible for the taxes. But, if the QDRO splits the amount, both spouses share the tax liability on their respective portions.
5. Tax implications
Taxes play a significant role in every divorce settlement. First, if you filed jointly during your marriage, your filing status will change to Single or Head of Household.
This shift alone brings potential changes to your tax bracket and deductions. However, it’s not the only tax consideration divorce brings. Others include (but aren’t limited to):
- Capital gains taxes if assets are sold
- Tax penalties for early retirement account withdrawals
- Impact on tax deductions, such as mortgage interest and child tax credits
- Changes in how alimony is treated for tax purposes
That’s why financial planning during your divorce isn’t just optional. It’s essential.
Don’t go through the divorce process alone
Getting divorced is so much more than just splitting assets and signing papers, especially when large assets are involved. Going it alone isn’t the best move, even for less complex divorces.
Having a skilled team in your corner—including experienced legal counsel, an accountant, a financial advisor, and mental health support—can help protect your interests and set you up for a fair settlement.
Whether you’re digging into the details of your situation or doing some tough negotiating, the right team makes all the difference.
Reach out to us to schedule a strategic planning session and explore your options.
