An Overview of Tax Concepts in Minnesota Divorce

October 13, 2022  |  Jason C. Brown

Let’s be honest. Tax issues are dull. But if you are facing a divorce, they play a vital role in the outcome of your case. Our family law attorneys understand the implications of tax law in family court and have preserved substantial sums of money for our clients as a result.

A good starting point in a discussion surrounding tax and divorce involves the filing status of the parties after dissolution of their marriage. Parents can yield a substantial benefit if they are able to claim, “head of household.” All that is required is having a child reside in your home for the majority of the year. If parents share equal parenting time with more than one child, we will draft the decree in a manner that gives each a head of household status.

The timing of the entry of the divorce decree can impact tax refunds or liabilities. Quite often we purposefully wait until after the first day of the year (or hurry things along before the year ends) under the premise that filing “single” versus “married” can have significant tax ramifications. Because tax refunds or liabilities are typically treated as an asset or debt of the marriage, the parties have a common tax avoidance goal.

Many wonder whether a non-custodial parent has the right to claim a child as a dependent. The short answer is “yes,” so long as the divorce decree grants them the right to do so. The Minnesota Supreme Court has made it clear that judges have the ability to award dependency exemptions to a parent who has less than equal time with a child.

Child support payments are not subject to income tax. Nor are they deductible. Payments stem from after-tax income and do not need to be reported on a tax return.

Like child support, spousal maintenance payments are now free of a tax consequence. Until the tax code overhaul a few years ago, alimony payments were considered taxable income to the recipient and deductible to the payor. That rule stood for approximately 75 years. Bear in mind, however, if you currently have a spousal maintenance obligation pre-dating the changes to the tax code and seek to modify it, the old tax rules of income and deductibility apply – unless the parties agree otherwise.

In dividing assets, significant attention must be paid to the tax consequences associated with certain items – such as retirement accounts, commercial real estate, vacation homes, and health savings accounts. It is crucial to value those items with a tax implication attached.

Finally, if your spouse has deceived the IRS in some manner, without your knowledge, you may be protected from responsibility through something called the “innocent spouse doctrine.” It is not uncommon for one party to a marriage to take the lead on managing household finances and ask the other to sign the return on trust.

Facing divorce? Be certain your lawyer understands the nuances of tax law. It can make a big difference in your financial future.