What You Need to Know About Divorce and Taxes
Responding to the changes brought on by divorce is no easy matter, as they encompass nearly every aspect of a person’s life. One’s finances are heavily impacted by this process, since the resources available to each spouse will be reduced after one household is split into two. The payment of child support and alimony are further expenses that can strain a person’s budget.
Taxes is one area that is less discussed but is still vitally important to achieving a fair property settlement and understanding how one’s financial picture will look for at least the next few years. Spouses should understand the tax consequences of divorce, including how taxes apply to the division of assets and debts, as well as their post-divorce income tax liability. This issue is of particular importance, as the window to take advantage of the current tax law that allows the payor to deduct alimony payments is closing at the end of 2018.
Because some tax repercussions do not appear immediately, the real economic implications of divorce agreements and associated court orders may not be felt until the divorce has been completed. Understanding these issues can help divorcing spouses avoid being blindsided by potential tax liabilities in the future.
Most married couples file joint tax returns to take advantage of deductions offered to married spouses. Those who are still legally married at the end of the year may elect this option when filing taxes for that year, even if divorce proceedings are ongoing. However, once the divorce has been finalized, each former spouse must file an individual tax return for the year in which the marriage officially ended.
This can put both spouses into different tax brackets, potentially increasing their tax liability. Those who are able to claim child tax credits can offset this increase, and along with allocating parenting time and parental responsibilities, the divorce decree should specify how tax deductions for children will be divided between the parents.
The decisions made about property division during divorce can have significant tax consequences, since the sale of real estate can trigger capital gains liability, and accessing certain retirement accounts can result in income tax liability for any distributions, as well as potential penalties.
Spouses should take into consideration how accessible the funds in their financial accounts are, particularly if the funds will be needed for living expenses, and how withdrawals from these accounts are treated by the IRS and Illinois tax authorities. Thus, working with an experienced divorce attorney and financial experts to assess the short- and long-term tax consequences of each asset a married couple owns will help to craft a fair property settlement that does not leave one spouse shouldering more of the tax burden simply due to the types of accounts he/she receives.
Child and Spousal Support
Finally, as mentioned above, a former spouse who is currently paying alimony can deduct this amount from his/her taxes, while the recipient reports it as taxable income. This arrangement encourages some spouses to more readily agree to spousal support, since this benefit defrays some of the expense.
This ability, however, will end in 2019, and for any divorce granted on or after January 1, spousal maintenance will be treated the same as child support, which is neither deductible from taxes nor counted as taxable income. This change will increase the payor’s post-divorce expenses, making financial adjustments more difficult, so spouses may wish to finalize their divorce before the end of the year, before the tax law change alters the financial landscape for divorced individuals.
Contact a Rolling Meadows Divorce Lawyer
The nature of divorce raises a lot of questions that often do not have easy answers. Balancing finances during and after divorce is one of these issues, but working with dedicated Hoffman Estates family law attorney Nicholas W. Richardson will ensure that you have the support and guidance you need to make informed and prudent decisions. Attorney Richardson handles all aspects of divorce, and he is available to discuss the particulars of your case. Contact our office at 847.873.6741 to arrange your free initial consultation.