Divorce causes changes in multiple areas of a person’s life, but one that is often overlooked is a spouse's tax bill. Regardless of the time of year when you divorce, your next tax return is likely going to be affected by such a profound life change. You will likely lose certain exemptions and deductions, but you may also gain some. The important thing is to ensure an active role in how your divorce decree is written, so you can have as much control as possible over the tax consequences for both you and your ex-spouse.
Alimony and Child Support
Perhaps the most unpleasant surprise for so many is the tax consequences of alimony and child support. While the parent with the majority of the parenting time will be granted child support in all but the most unusual Illinois divorce cases—child support is a duty owed to the child or children, not to the ex-spouse—alimony or spousal support is a different matter. To determine whether such payments are warranted, the court will consider a host of factors, such as the income of both parties, the amount of support given during the marriage if one spouse had to leave the workforce for some reason—including giving birth or obtaining an advanced degree—and the actual current needs of each spouse.
The potential issue is simple: periodic maintenance, which is spousal support paid in increments over time, is taxable as income for the recipient and tax deductible for the payor. Child support is not taxable as income for the recipient and not deductible for the payor. As such, a significant maintenance award can cause serious tax consequences for a parent. One of the listed factors that a court will consider in awarding maintenance is the tax consequences, but not every court will actually consider them, or the court may consider the other factors to hold more weight than the alleged tax burden would be.
Child-Related Deductions and Credits
The other major concern for many divorcing couples is who gets to claim the exemption for any children of the marriage. Depending on your income, claiming the exemption may save you as much as $1,000 per minor child, and as such, it can be a very big help for divorced parents in lower tax brackets. Since 1997, being able to claim the exemption also means the ability to claim the child tax credit, as well as “scholarships” if you are paying tuition for one or more college-age children.
The exemption may be traded to the other parent if it would benefit them more. The exemption is valuable to those with incomes on the lower side, generally, as incomes over about $100,000 will price themselves out of any benefit, but other credits like the child care credit must remain with the custodial parent. Some parents misunderstand the value of the exemptions, or try to fight for them out of some kind of misplaced pride, but the best policy is generally to negotiate something in return for such exemptions if you would receive no benefit from using them.
Need Help Understanding Potential Tax Consequences?
Divorce is difficult enough without having to potentially make significant changes to your financial siutation. If you need assistance navigating the potential pitfalls, our experienced DuPage County divorce attorneys can help. Contact our offices today to set up an initial consultation.