Key Tax Implications of an Illinois Divorce

 Posted on June 21, 2023 in Divorce

In Illinois, certain tax implications can significantly impact the terms of a divorce agreement. These should be discussed during negotiations. Some of them include the following:

Your Tax Filing Status

Whether you wish to join separately or together for the previous year will depend on when the divorce was finalized. For instance, if it was finalized on December 31st before 11.59 pm, that means you were not legally married before that time and can file separately for that year. Additionally, you may be able to file as the head of the household if you had child custody for at least six months of that year.

If the divorce was not finalized before the year ended, you and your ex-spouse could determine your filing status. If a party cannot decide, a judge decides how tax refunds and owed taxes are divided.

Cash and Property Awards in a Divorce Decree

Property and cash acquired pursuant to a divorce decree in Illinois are nontaxable for the person receiving them. This means the person providing them cannot deduct them from their taxes. The property and money that spouses own are presumed to be earned by the party – it is presumed they have already paid taxes on these.

Certain property settlements and back taxes can lead to an IRS audit. This may happen if property settlement is treated as a spousal settlement but wasn't called maintenance so it wouldn't be taxed. An accountant can help you determine unintentional tax consequences.

Tax Credits and Dependents

When parental responsibilities are being determined, Illinois courts focus on the children’s best interests. As a parent, you should be aware of the tax exemptions you can claim when it comes to your children.

Children are considered dependents of the custodial parent, but the court may order alternative yearly exemptions depending on the circumstances surrounding the case. In case the other parent does not claim exemptions when their turn comes around, you, as the custodial parent, must submit a specific form with your tax return.

Additionally, parents may also be eligible for the following:

• Child tax credit - Qualifying parents can claim up to $1,000 in tax credits per child. Please note that the child must be a dependent under 17 years of age at the end of the tax filing year. If your children are younger than 13, you can claim a tax credit to cover a part of childcare expenditures.
• Taxes for retirement accounts - Retirement funds such as 401(k) accounts are generally nontaxable. However, tax penalties can be divided into withdrawn funds and payments after a divorce is legally finalized.

Contact a Kane County Divorce Attorney

A divorce has several moving parts that can be overwhelming to manage. Critical decisions have to be made that may impact your family and future. This includes tax implications, which most divorcing couples fail to take into account to their detriment. A St. Charles divorce attorney from Shaw Sanders, P.C. can help you determine tax liabilities and how they can affect the divorce agreement. Contact our office for a free consultation today by dialing 630-584-5550.

Sources:

https://www.ilga.gov/legislation/ilcs/ilcs4.asp?ActID=2086&ChapterID=59&SeqStart=6000000&SeqEnd=8300000