If you’re considering divorce, you’re considering all the financial factors that go along with it. For many, this means considering big things like property, bank accounts, retirement savings, and more. But, what about taxes?
Few people are familiar with tax law. Even those who are sometimes struggle to make sense of what it’s going to mean to go from married filing jointly to single or how various components of the divorce, like child support payments, factor into taxes.
In this article, we’ll discuss the most important tax implications of divorce, including:
- Property settlement;
- Child support payments;
- Child exemptions; and
- Spousal Support/Alimony
Property settlement is tricky and becomes even trickier when you consider the tax implications of settling some property, like a mortgage.
Most divorces focus on an “equitable division of the assets.” This doesn’t necessarily mean that each spouse takes 50 percent of the assets either. In fact, if one spouse earns a disproportionate amount of money in excess of the other, it’s likely they’ll receive less property in the divorce as a result.
With that being said, it’s important to consider which property comes with a tax bill to ensure division is actually equitable, as it’s supposed to be. Thus, if you’re getting the home as part of the divorce and need to refinance your mortgage or are making other changes in financial arrangements, it’s important to understand what you owe before agreeing to anything in the divorce.
Child Support Payments
Child support payments aren’t deductible on your personal income tax, though the income the spouse receiving the child support receives is not subject to taxes. To many, this seems unfair because while one spouse is paying the money – along with the taxes on it – the other spouse is receiving the payments tax-free. As such, you cannot try to deduct the income under another name on your tax returns, as it will be rejected.
You must pay for child support for the length of time specified in your divorce judgment. Tax obligations won’t change so you won’t be able to deduct child support at any time.
Children can still be claimed as exemptions once your divorce is over. In the past, exemptions typically went to the parent who had custody of the children. Because custody is no longer valid in Illinois, this is no longer true.
Most Naperville divorce attorneys serving Wheaton, St. Charles, Oswego, and other surrounding towns negotiate an arrangement with your spouse’s attorney to determine how exemptions will be divided. For example, some couples with two children each get one exemption. If one spouse doesn’t work and the other does, the working spouse will often get both exemptions. If you have an odd number of children, many former spouses alternate who receives two exemptions and who receives just one every other year.
Alimony or Spousal Support
Unlike child support, which is not deductible to the paying spouse, spousal support payments are. Moreover, the spouse receiving spousal support must pay taxes on the income. Essentially, it works in opposition to child support.
But, What About Unallocated Support?
Unallocated support is combined child and spousal support, however the amount of the support is not allocated between child and spousal support – it’s merely one lump sum.
The IRS treats unallocated support as “alimony,” meaning the spouse paying can deduct the money from taxes whereas the spouse receiving the support will have to pay for it accordingly. Typically, this means a spouse may receive more in unallocated support because the spouse paying can deduct the money from their taxes.
How Will Divorce Affect Your Taxes?
Navigating the property settlement and support payment arrangements of divorce can be complicated. By understanding the implications underlying these decisions, you can ensure they work to your benefit and you aren’t taking on any property or other assets that may mean you receive less in your divorce.
If you’re confused about the tax implications of divorce or would like to discuss each area in more detail with your specific needs in mind, contact Larry today at 630-470-9990 or submit an online request to take advantage of your free, 30-minute consultation. Larry has over 35 years in divorce and family law, including navigating the complexities of taxes and how they affect property settlement and the rest of the divorce process.
We look forward to hearing from you to learn how we can better tailor our services to your needs during the divorce process!