Preparing for the Tax-Related Consequences of Divorce

Just as the legal formalization of a marriage has tax-related consequences, so does its dissolution. If you have recently divorced or are in the process of divorce, it is important that you understand and prepare for the tax-related consequences of the decisions made regarding spousal support, the allocation of parental responsibility, and the division of the marriage’s assets. In the interest of avoiding serious financial hardships, it is imperative that these issues are dealt with as early as possible.

Child Support and Spousal Support Are Primary Tax-Related Issues Following Divorce

Currently, child support payments and spousal support payments are taxed differently. Spousal support (sometimes termed “maintenance” or “alimony”) is tax-deductible for the payor and is classified as taxable income for the recipient, while child support is not tax-deductible for the paying parent or taxable for the receiving parent. In some cases, it possible for divorced spouses to reach what is termed an “unallocated support arrangement” in which child support and spousal support are not differentiated into separated payments. Rather, they are combined into one fully tax-deductible/taxable payment – a beneficial simplification in instances, for example, in which one spouse earns the bulk of the income and the other spouse has been and will continue to be a stay-at-home parent.

Following the passage of the Tax Cuts and Jobs Act of 2017, the way child support and spousal support payments are taxed will be changing significantly. Beginning January 1, 2019, spousal support will no longer be tax-deductible for the payor or taxable for the recipient. Divorcing spouses should be aware of how their tax obligations will affect the support they pay or receive, and they may wish to finalize their divorce prior to this change in order to take advantage of the current law’s tax benefits.

Tax Implications of Allocation of Parental Responsibility and Asset Division

With the increasing complexity of child custody arrangements in recent years (e.g. joint custody with equal parenting time), it is essential that the parties reach a clear understanding as to which parent will be able to claim children as dependents on their taxes. With this decision made, subsequent support-related issues may be nuanced and clarified.

The division of assets occurring during a marriage’s dissolution may also have tax implications in Illinois. For example, the spouse who retains ownership of the marital home will be required to pay property taxes, and spouses should understand whether any taxes will apply to the division of investment and retirement accounts. In addition, there may be capital gains taxes in the event real estate is sold, or when a family-owned business is divided.

An In-Depth Understanding of the Tax Implications of Divorce

In order to safeguard your financial future following your divorce, it is important to consult with an experienced attorney who can help you understand how the decisions you make will affect your taxes. At the Law Offices of Nancy Kasko, LLC, our attorneys will answer your questions and work to protect your rights and your financial interests during your divorce. Contact a Winfield divorce attorney at 630-836-8540 to schedule a free consultation.

Sources:

http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2086&ChapterID=59