Capstone Financial Advisors

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4 Planning Considerations for Divorcing Couples

Key Points:

  • Although a highly personal process, divorce has significant financial planning implications.

  • In addition to the typical planning decisions, divorcing couples now also need to be aware of the implications of the new tax law and the revised treatment of alimony payments.

  • After a divorce is finalized, it is critical that each party review their newly established balance sheet for important planning issues that can be easily overlooked.


Before moving forward with divorce proceedings, decisions involving family matters, income arrangements, and asset-division need to be made. To create a division that feels equitable, couples will typically substitute certain assets to be retitled to themselves individually after the divorce finalizes. Although current asset values are often used to create that equitable division, the type of asset and its tax treatment are often overlooked. The Tax Cuts and Jobs Act (TCJA) adds some additional considerations to be aware of, including changes to the tax treatment of alimony income.

After-Tax Value of Different Account Types

When withdrawing money from an Individual Retirement Arrangement (IRA account) or retirement plan (e.g., a 401(k) or 403(b)), ordinary income tax may be due upon distribution. On the other hand, distributions from a brokerage or other after-tax savings account are most often subject to capital gains taxation. Divorcing spouses will frequently agree to maintain their respective retirement account balances and then divide up other assets to make up value discrepancies. Because of the different income tax treatment by account type, this could be a costly oversight for the spouse who agrees to retain a more significant portion of the marital retirement dollars that would be subject to higher ordinary income tax rates, and possibly even penalties, upon withdrawal.

Sale of Primary Residence

One spouse may consider keeping the primary residence after divorce proceedings. If the house has appreciated in value since the time of purchase, there can be significant equity that has built up. However, the house has likely built up a significant capital gain tax liability as well. As a married couple, the capital gain on the sale of a primary residence (provided certain usage requirements are met) is excluded from taxation up to $500,000. As a single tax filer, that exclusion is only $250,000. Although a family’s home has unmeasurable personal significance, forgoing a sale on the residence before the divorce finalizes can potentially create a dramatic change in tax implications for the future owner of that home.

New Tax Law Changes to Alimony

Historically, alimony paid has been deductible by the payor and reportable as income by the recipient. The passage of the TCJA changes that and now treats all payments as non-reportable from a tax perspective by both parties. (Divorces that are effective before 01/01/2019 retain their original treatment.) There are other implications beyond that tax impact that will affect financial planning. For example, alimony recipients have previously been able to include alimony payments in reported income to support debt-to-income ratios as part of a mortgage application process. Recipients of alimony payments have also been able to qualify for IRA contributions based on the support. Going forward, these and other planning considerations will need to be evaluated in light of the TCJA changes.

Post-Divorce Planning

After a divorce is finalized, it is critical that each party review their updated balance sheet for important planning issues that can be easily overlooked. Although the divorce may have been finalized with assets divided and retitled, other things like beneficiary designations as well as any transfer on death designations should be updated across financial assets to ensure assets do not flow to unintended beneficiaries. Life insurance policies, social security, and other pension benefits should also be re-evaluated.

Divorce has a variety of financial planning implications. After separating, individuals are eager to move on with their lives, yet it is important to evaluate the next steps in the process thoroughly. The decisions made during the divorce and asset division proceedings can have far-reaching consequences well beyond the conclusion of the divorce proceedings themselves. Impacted individuals are encouraged to consult with their attorney or a financial advisor with experience in divorce-related planning issues.