Tag Archives: taxes and divorce

Taxes and Divorce in Illinois

taxes. DuPage County divorce attorneysIf you are going through divorce proceedings or considering initiating a divorce, you may have questions about how getting divorced in Illinois may affect your tax liability, especially if tax season is nearing. Dealing with taxes in the midst of a divorce can be problematic and fraught with emotion, and the process becomes even more complex when the taxes themselves are complicated.

Going through a divorce is stressful enough, and worrying about how the divorce may affect your taxes should not be something you need to handle alone. No matter what your tax situation looks like, an experienced Illinois divorce attorney in DuPage County can help make sure your rights are protected and that your tax obligations are met.

Common Tax Issues That May Arise During an Illinois Divorce

There are several issues that may affect a person’s tax liabilities when he or she is going through a divorce or has recently finalized a divorce. Some of the most common matters that arise include questions about:

  • Working amicably with your spouse or ex-spouse to plan how the tax returns will be filed;
  • Filing as married jointly or separately, or unmarried;
  • Considering delaying finalizing the divorce in order to file one final joint tax return;
  • Who will claim the children as dependents;
  • How child support obligations may impact dependent exemptions;
  • Splitting exemptions when there are an odd number of children;
  • Which parties may claim which deductions;
  • Determining how and whether a tax return will be split;
  • Including any alimony payments in gross income on tax returns;
  • Deciding which party owes what portion of taxes due to be paid;
  • What to do if either party was not a resident of Illinois during the tax period, or you lived apart all year and shared no income;
  • How a shared business or partnership factors into tax liability after divorce;
  • Whether you can deduct legal fees associated with tax advice related to your divorce; and
  • Indemnification protections if your spouse engages in any misconduct or false statements.

Consult an Experienced Family Law Attorney in DuPage County

Our family law attorneys are experienced in working with divorcing couples who have complicated tax issues. We regularly consult with financial and tax professionals – such as appraisers, actuaries, and accountants – who can advise regarding even the most complex tax matters.

Whether you believe your taxes may become a sticking point in your divorce, or you simply want to plan ahead to prevent any hang-ups when it comes to filing your taxes during or after your divorce, do not hesitate to consult with one of our experienced DuPage County divorce attorneys.




The Tax Consequences of Divorce

Ordinarily, the transfer of property comes with some sort of tax consequences. Since divorces can involve a lot of property transfer, you might expect complicated taxes surrounding them. Fortunately, the IRS exempts from taxation most property exchanges that take place in a divorce; however, appreciated assets, like stocks, and retirement accounts both come with particular tax issues.

 Tax consequences of divorce IMAGEGeneral Tax Rules

Section 1041 of the Internal Revenue Code governs transfers between spouses and transfers related to divorces. The law generally exempts transfers so long as the transfer happens prior to the finalization of the divorce. The code also excuses transfers made after the divorce, so long as they are “incident” to it. A transfer counts as incident when it occurs within one year of the end of the marriage, or within six years of the end of the marriage if the divorce agreement requires such a transfer.

Appreciated Assets

Unlike most possession, assets that have appreciated in value, like stocks, can cause tax issues if a spouse transfers them during a divorce. While no one owes taxes when the spouse transfers the stock, taxes do come due when the recipient spouse decides to sell. Exactly how the IRS taxes the stock depends on how long the spouses held it. If they held it for more than a year between them, then the IRS taxes the appreciation as a capital gain. Note that the clock for the year begins to run when the first spouse purchases the stock, not when they transfer it in the divorce. This means that, after taxes, appreciated assets can be worth less than an equal amount of cash, since the recipient spouse will owe the capital gains tax when they decide to sell it.

Retirement Accounts

Transferring retirement accounts like IRAs can also come with serious tax consequences if not done correctly because the IRS places a penalty tax on early withdrawals from IRA accounts. This means that a spouse who simply withdraws cash from their IRA, and then gives it to the other spouse will incur a 10 percent tax on the money that they give away. Fortunately, transfers of an IRA can qualify as tax free under section 1041. Assuming that the transfer occurs incident to a divorce, then the spouse can move their money into a new IRA account in the recipient spouse’s name in order to avoid the penalty tax.

Legal Help

Divorces can be challenging and complex to navigate on your own. Contact an experienced DuPage County divorce lawyer today. Their knowledge can help you as you make your way through this difficult process.