The dissolution of a marriage can result in a dramatic shift in one’s financial landscape. From the division of retirement accounts and other financial assets to changes in your tax filing status and insurance needs, each aspect demands careful consideration to mitigate the long-term impact on your financial well-being. A financial advisor can be a valuable resource to help you deal with the financial challenges of divorce.
1. Income
One of the most immediate impacts of divorce is the potential change in income. For many, the shift from a dual-income household to a single-income situation can dramatically alter their standard of living. It’s not just about losing a portion of household income – it’s also about adjusting to the cost of living independently. This change can be particularly challenging for the partner who earns less or has been out of the workforce, as they may struggle to regain financial footing post-divorce.
While a frequently-cited 2012 study from the U.S. Government Accountability Office revealed that women’s household income typically plummets by 41% post-divorce – a figure that is nearly twice the financial impact experienced by men – more recent data show a different trend.
Guillaume Vandenbroucke, an economist and senior economic policy advisor at the Federal Reserve Bank of St. Louis, found that men – at least recently – have sustained higher average income losses after divorce than women.
In 2022, women saw their income fall by 9% following a divorce, while men experienced a 17% decrease. “This difference between men and women is most visible in their 30s, during which men lose close to 40% of their income following a divorce, while women lose noticeably less,” Vandenbroucke wrote.
2. Retirement Accounts
Retirement accounts, including 401(k)s, IRAs and pensions, are often subject to division between spouses. How the retirement savings are divided among the spouses varies based on where the couple was living and whether the assets predate the marriage.
Generally, retirement account contributions and investment earnings from before the marriage are treated as “separate property” and aren’t divided in a divorce. However, account contributions made during the marriage – and subsequent investment earnings – are considered “marital property” and may be divided in a divorce.
In the nine community property states, marital property is split 50/50. In equitable distribution states, meanwhile, the court will determine how marital property is divided between divorcing spouses, considering:
- The duration of the marriage
- The income and future earning potential of each spouse
- Both financial and non-financial contributions to the marriage
The treatment of different retirement accounts can vary in a divorce. For instance, a 401(k) is typically divided using a qualified domestic relations order (QDRO), which allows for the distribution of retirement plan assets to the non-employee spouse without incurring early withdrawal penalties.
IRAs may not require a QDRO but are still divided under the divorce decree, with the division method varying depending on whether it is a traditional or a Roth IRA. Pensions are also divided using a QDRO, with the division based on the duration of the marriage during the employment period in which the pension was accrued.
3. Other Financial Assets
Beyond retirement savings, divorce can impact other financial assets such as investments, savings accounts, personal property. The division of these assets is usually governed by state laws, which may follow community property or equitable distribution principles.
When assets such as private business interests or artwork are part of the marital estate, their division becomes particularly intricate. These types of assets may lack a readily ascertainable market value, necessitating professional valuation, which can introduce additional costs and delays into the divorce proceedings.
Moreover, the sale of assets to distribute proceeds equitably can further complicate matters, as it may not always be possible or desirable to liquidate certain assets quickly without incurring significant losses.
4. Home Ownership
For many couples, the family home is not just a significant financial asset but also an emotional one. Deciding who keeps the home, or whether to sell it, can have substantial financial implications. Legally, the home is often considered marital property, meaning it was acquired during the marriage and is subject to division between the spouses. Of course, the approach to this division varies significantly depending on the state’s laws.
The most straightforward solution is to sell the home and divide the proceeds. However, this can lead to capital gains tax implications if the profit exceeds $250,000 for an individual or $500,000 for a couple. Alternatively, one spouse may opt to buy out the other’s interest in the property. This requires a valuation of the home’s fair market value and, if a mortgage is involved, the ability of the purchasing spouse to refinance the home in their own name.
A less common but viable option is for the spouses to maintain co-ownership of the home under specific conditions, such as agreeing to provide stability for children until they reach adulthood. This arrangement necessitates a clear and legally binding agreement regarding ongoing responsibilities for mortgage payments, property taxes, and maintenance costs.
5. Credit Score
While divorce itself does not directly affect credit scores, the financial upheaval it brings can. Joint accounts, if not managed properly during and after the divorce, can lead to missed payments and increased debt, negatively impacting credit scores. The longevity of one’s credit history, which can bolster a credit score, may also be compromised if the joint accounts that are closed happen to be those with the most extensive history.
6. Debt
Divorce proceedings expose the intertwined financial responsibilities that both parties have accrued, which can include a variety of obligations. These debts may consist of credit card balances, mortgages and personal loans.
Again, the treatment and division of debt depends on when the debt was incurred and the type of state a couple lives in. In community property states, the legal framework dictates that debts incurred during the marriage are typically deemed the collective responsibility of both spouses. Conversely, equitable distribution states approach the division of marital debt differently. Rather than an automatic equal split, courts in these states aim to divide debts in a manner that is equitable and just, which may not always equate to a 50/50 division.
7. Tax Status Changes
When a couple parts ways, the IRS requires each spouse to reassess their tax filing status, which can significantly influence their tax rates and standard deductions. Couples that previously filed joint tax returns must now choose between single or head of household status based on their circumstances as of the last day of the tax year. Those who file as head of household can yield a higher standard deduction and potentially benefit from more favorable tax rates.
To qualify as single, one must simply be unmarried. Meanwhile, to qualify for head of household status, an individual must pay over half the costs of maintaining a home and have a qualifying dependent, which could be a child or any other dependent under IRS rules.
2024 Federal Tax Brackets
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $11,600 | $0 – $23,200 | $0 – $11,600 | $0 – $16,550 |
| 12% | $11,600 – $47,150 | $23,200 – $94,300 | $11,600 – $47,150 | $16,550 – $63,100 |
| 22% | $47,150 – $100,525 | $94,300 – $201,050 | $47,150 – $100,525 | $63,100 – $100,500 |
| 24% | $100,525 – $191,950 | $201,050 – $383,900 | $100,525 – $191,950 | $100,500 – $191,950 |
| 32% | $191,950 – $243,725 | $383,900 – $487,450 | $191,950 – $243,725 | $191,950 – $243,700 |
| 35% | $243,725 – $609,350 | $487,450 – $731,200 | $231,251 – $365,600 | $243,700 – $609,350 |
| 37% | $609,350+ | $731,200+ | $365,600+ | $609,350+ |
Meanwhile, recently-divorced couples see their standard deduction effectively cut in half, now that there’s presumably only one taxpayer in their household. In 2024, the standard deduction for individuals is $14,600, while it’s worth $29,200 for married couples filing jointly.
8. Child Support and Spousal Support
Child support is a financial obligation imposed on the non-custodial parent to contribute to the costs associated with raising their children. In the United States, the legal framework for child support is underpinned by federal guidelines, which serve as a benchmark for states to model their child support programs.
However, each state has the discretion to tailor its child support calculation methods, leading to variations across the country. The factors that typically influence the amount of child support include the incomes of both parents, the number of children, custody arrangements and the specific needs of the child, such as educational expenses, healthcare and childcare costs.
Spousal support, or alimony, represents another facet of financial obligations that arise after a divorce. Both child and spousal support share the common theme of ensuring financial stability, yet they cater to different needs. Spousal support involves a legal mandate for one spouse to provide financial assistance to the other post-divorce. The types of spousal support include temporary support during the divorce process, rehabilitative support aimed at enabling a spouse to become self-sufficient and permanent support, which may continue indefinitely.
The determination of spousal support is contingent upon various factors, such as the duration of the marriage, the standard of living during the marriage, as well as the age, health and earning capacities of both spouses.
9. Insurance
Marital status is a pivotal factor in the determination of insurance rates and coverage, with many insurers offering discounts to married couples on policies such as auto and home insurance. These discounts are typically rescinded following a divorce, which can lead to an increase in premiums for the individuals involved.
For example, after a divorce, your auto insurance premiums could go up if you had always been under your spouse’s policy, which offered a substantial married couple discount.
Health insurance is particularly susceptible to the effects of divorce, especially in situations where one spouse is covered under the other’s employer-sponsored plan. Post-divorce, the dependent spouse may find themselves in need of an individual policy, which can be more costly and offer less comprehensive coverage.
To address this, it’s essential to understand options like the COBRA Continuation Coverage, which allows for temporary continuation of health coverage at group rates. However, COBRA coverage can be expensive and is not a long-term solution, so it’s important to plan for alternative coverage options.
Bottom Line
Divorce is a pivotal event with significant financial implications that can redefine one’s economic landscape. From asset division to tax considerations and insurance adjustments, each area demands careful consideration to mitigate the long-term impact on your financial well-being.
Financial Tips for Divorce
- Divorce can alter and complicate your financial plan, requiring you to create a new one. After the divorce is finalized and your assets have been divided, you’ll need to assess your new financial reality. You’ll want to take stock of your budget, emergency savings, insurance needs, updated tax status, among other areas of your financial life. Here’s a guide to financial planning before, during and after a divorce that may help you through this process.
- A financial advisor can help you get your finances back on track after a divorce. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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