For many couples in Illinois, the decision to get a divorce is not one that is easily made. No matter what level of income or assets is at stake, a separation in Illinois usually entails property division. Couples should go into divorce proceedings with even a basic knowledge of how taxes may come into play in order to ensure that they are receiving what they are legally due.
Simply dividing property is not an event that can be taxed. There are measures in place, such as qualified domestic relations orders, that will prevent a spouse from being taxed if he or she receives a portion of a retirement plan. However, there are situations in which an asset’s true value is actually lower than its face value due to taxes. For example, a spouse will still have to follow retirement plan guidelines upon cashing out and the amount will likely be subject to tax. Additionally, if the couple chooses to sell the house and the divorce is finalized by Dec. 31, each spouse is only entitled to $250,000 in tax-free gains instead of the $500,000 extended to married couples.
There are other tax considerations as well. Child support is not tax-deductible, but alimony is. Spouses who receive alimony are required to report it as income on a tax return. In many cases, only the spouse with primary custody of children can claim them as dependents, though a couple can negotiate other terms.
Anyone considering divorce should work with an attorney who understands how to find the true value of an asset. That can help to ensure an equitable division of property.
Source: Financial Advisor, “Tax Expertise: A Valuable Skill Throughout Divorce,” Joseph E. Cordell, June 5, 2014
