Tax Consequences of Illinois Divorce

 Posted on April 09, 2018 in Divorce

Divorce affects every aspect of one’s life, from the physical to the emotional to the financial. It is the latter, however, that can sometimes surprise people, and the tax consequences can be the most shocking of all if someone is unprepared for them. While divorce may be the best option for you and your spouse, it is nonetheless important to be prepared for the potential financial changes that may occur.

Tax Brackets and Details

Most married couples choose to file a joint return, and if you are still married on December 31 of a year, you may file jointly for that year - even if your proceedings are in motion on that date, unless a divorce decree has officially been issued, you are considered married. Once your divorce is final, however, you must file as a single person, and this can sometimes mean a change in tax brackets, though property division is usually tailored to try to avoid that.

Issues also may appear when dealing with details such as exemptions or refunds - for example, couples may dispute who may claim the exemptions for the children. In 2017 and the past, the exemption is usually taken by the custodial parent if both parents supported the child, though in 2018 this may change due to the recent modifications to the tax code. Either way, it is possible for the spouses to negotiate who will claim the exemption or exemptions, and it will generally be accepted - decisions like this are able to be included in pre- or post-nuptial agreements, and prenups (or postnups) will generally pass muster in Illinois unless they are clearly unconscionable.

Avoiding Potential Tax Bombshells

The general aim of most asset division proceedings is to preserve a standard of living for each spouse that is as close to the married standard as possible. This means that sometimes, measures can be taken to help equalize the potential tax burdens for both spouses. A good example is with retirement accounts - many people have retirement accounts, but without experienced knowledge, they may withdraw the balance before the appropriate time, incurring a significant tax penalty.

Sometimes, it may be possible to report relevant income in a way that equalizes tax burdens while still preserving legality. This is called unallocated support. Normally, child support is non-taxable for the recipient, and non-deductible for the obligor (the payor), while alimony is considered taxable income for the recipient and tax-deductible to the obligor. Unallocated support is when all of it is reported, but as a lump sum - thus, all of it is considered alimony. If the obligor has a higher income, this can help the obligee avoid significant tax issues.

Call Our DuPage County Divorce Attorneys

Divorce is meant to be an amicable separation that allows people to get a fresh start after marriage, and being saddled with unexpected tax consequences can be a roadblock. The passionate DuPage County family law attorneys at Kathryn L. Harry & Associates, P.C. can help you better understand the process of asset division, and will work to ensure that the tax consequences of your divorce are as fair and equitable as they can be. Contact our offices today to set up an initial consultation.

Sources:

https://www.irs.gov/publications/p501#en_US_2017_publink1000220868

http://www.ilga.gov/legislation/ilcs/documents/075000050K503.htm