Divorce changes everything, even taxes. If you are preparing to get a divorce, you need to understand how this could affect your finances and taxes. It can be complicated, but is better handled with an experienced attorney. They can help you see the potential tax ramifications and assist in limiting your exposure wherever possible.
At Kulerski & Cornelison, our team serves families DuPage and Cook counties. We can assist you with the tax implications of your Illinois divorce and more.
When Your Divorce is Final Matters
Under both federal and Illinois law, your marital status on December 31 affects your filing status for the whole year.
You are considered married for tax purposes if:
- Your divorce is not yet finalized by December 31
- You are legally separated but without a final judgment of dissolution
You are considered single for tax purposes if:
- Your divorce judgment is entered on or before December 31
There are potential exceptions and caveats to this, as with anything having to do with taxes. Speak to your lawyer about your specific situation.
Child-Related Tax Benefits: Who Claims What?
Parents often overlook how valuable child-related tax benefits can be. These benefits include:
- The Child Tax Credit
- The Dependent Care Credit
- Head of Household filing status
- Education-related credits
- Dependency exemptions (for years when they applied)
Who Gets To Claim the Child?
Under IRS rules, it is usually the custodial parent who gets to claim the children. But, parents can agree otherwise in specific circumstances, especially if both parents have custody of the children. Your divorce decree should specifically outline who can claim which children, and when.
Head of Household Status
A parent may qualify for Head of Household status if they:
- Are unmarried on December 31
- Pay more than half the cost of maintaining the household
- Have a qualifying child living with them for more than half the year
How Child Support and Spousal Support Affect Taxes
Support payments are another major tax consideration in an Illinois divorce.
Child Support
Child support is:
- Not taxable to the receiving parent
- Not deductible for the paying parent
Child support generally has no tax impact for either party.
Spousal Support (Maintenance)
For divorces finalized after December 31, 2018, spousal maintenance:
- Is not deductible for the paying spouse
- Is not taxable to the receiving spouse
Property Division and Capital Gains
Illinois uses equitable distribution to divide marital property, but the tax consequences of that division can vary.
Transfers Between Spouses
Property transferred between spouses as part of a divorce is generally not taxable. This includes:
- Real estate
- Vehicles
- Investment accounts
- Retirement assets (when transferred correctly)
However, the tax basis of the property carries over. This means the spouse receiving the asset may face capital gains taxes later when they sell it.
The Family Home
If you sell your home during the divorce, capital gains taxes might apply. Some spouses could be entitled to the home sale exclusion though, which allows up to:
- $250,000 in tax-free gain for single filers
- $500,000 for married couples filing jointly
Whether this will actually apply depends on many circumstances. It is important to get legal and tax advice before making any assumptions about how it will affect you.
Retirement Accounts and QDROs
Dividing your retirement accounts can be a big part of allocating assets. Transfers are generally made with a Qualified Domestic Relations Order (QDRO), and are usually not taxable events.
However:
- Withdrawals made outside a QDRO may trigger taxes and penalties
- The receiving spouse becomes responsible for taxes on future distributions
Tax Implications of Selling or Dividing a Business
If one or both spouses own a business, the tax implications can be significant. Issues may include:
- Capital gains
- Depreciation recapture
- Future tax liability tied to business income
Valuation and division should be handled with professional guidance to avoid costly mistakes.
Know How Your Divorce Will Affect Your Taxes
Both state and federal taxes can be impacted by your divorce. How exactly that will happen depends on your case and when the divorce is finalized. The right divorce attorney ensures your rights are protected throughout the divorce process, including watching out for potential tax ramifications of any decisions.
At Kulerski & Cornelison, our family law attorneys are ready to help. Contact us today for a consultation of your case.