I have a great deal of experience as a divorce attorney in Schaumburg and I rarely encounter prospective clients who are initially interested in the tax implications of their divorces. However, as I explain the subject, it is interesting to watch how people’s attitudes change.
The fact is that tax strategy is essential for divorces. It has far-reaching consequences for some of the more emotionally hard-hitting aspects of these cases, including child custody, spousal maintenance, asset division, the division of the family home, business division, and many more.
Every excess dollar you pay the IRS or the Illinois Department of Revenue is money you do not have for the future of your family. Every asset you receive with a disadvantageous tax burden represents a potentially unbalanced property division agreement. For a fair and favorable divorce, you need to consider taxes.
Introduction to the Tax Implication of Divorce
During marriage, couples generally benefit from a favored tax status. They can file jointly, enjoy a lower tax rate, and use more generous tax deductions. Among many other transitions, divorce is a move away from this status.
If you are going through a divorce or thinking of dissolving your marriage, it is important for you to know about the tax consequences you may face. Even filing a simple tax return can be quite problematic if you are in the midst of a divorce — and taxes are not something you want to lose in the constant shuffle of legal paperwork. If your taxes are a complex nature, then you will greatly benefit from having an experienced lawyer by your side who knows how to handles the interrelated issues of divorce and tax optimization.
At the Law Office of Fedor Kozlov, P.C., our attorneys have a thorough understanding of the tax implications associated with a divorce. We have exhaustive experience and in-depth knowledge of Illinois tax laws and their federal counterparts.
Our goal is to secure your future financial stability. We can provide you with reliable counsel and devise the best strategies, minimizing tax impact both during divorce and after. Moreover, we factor tax strategies into settlement negotiations, making sure your interests are protected and that the tax burden is distributed equitably across the marital estate.
Alternatives to Filing Jointly With Your Spouse
As mentioned above, divorced people do not qualify as married, and can therefore not file taxes jointly with their spouses. Additionally, there are some situations in which you might not want to file together with your spouse. One example might be if you believed your spouse was dishonest when filing returns.
As an alternative to filing jointly before your divorce is finalized, you typically have two options: Head of household and married filing separately. Filing as the head of your household is generally the preferred option, but you might not be eligible depending on your living situation. Married filing separately might not qualify you for the same types of tax advantages, but it could still be a good option if you wanted to avoid exposing yourself to fraudulent behavior.
Choosing how to file is an important decision. Especially if it is early on in the year and you believe that your divorce will last some time — if you have complex, highly contested child support and property division issues to work through, for example — then giving some due consideration to your annual taxes is probably going to result in significant savings.
Give us a call before you decide how to file. Our attorneys can take a look at your situation and help you formulate your next steps.
Common Tax Issues in a Divorce
Taxes affect several decisions made when negotiating a divorce settlement. The attorneys at the Law Office of Fedor Kozlov, P.C., are capable of handling all sorts of tax issues arising during divorce settlements. We can help you plan for the long-term health of your finances while meeting all obligations you have to Illinois and the IRS.
Every situation is different, but there are some commonalities. This is very apparent when taxes are concerned, as the same rules apply to everybody. The rules in this case just happen to be complex and difficult to navigate. Here are some of the general topics we handle.
Spousal Maintenance
Alimony and maintenance decided by the court have changed recently in terms of taxes. Formally, they were tax-deductible for the payer and taxable for the recipient. Now, they will not be part of your gross income.
One of the results of this is that paying spouses tend to be less incentivized to agree to large alimony payments. If you are the receiving spouse, you should still be able to get what you deserve.
Child Custody and Support
You might not think of children right away when you think of taxes. However, this is an important subject. Can you still claim your children as dependents on your return if you are the non-custodial parent? How do you manage contributions to educational savings accounts? These are questions we can work through with you as we represent you during a divorce.
There is also the matter of child support. For the payer spouse, child support is not tax-deductible. It is not taxed on the recipient. This is similar to the spousal support system.
However, that is not to say that your childcare burden is unrecognized by the government. The custodial parent may receive several benefits, including the child and dependent care credit and the child tax credit. We would need to look at your entire financial situation to determine whether is beneficial to claim these credits before advising you to do so.
Asset Division
Property division is a central concern for tax. In most cases, property transfers during a divorce do not have any tax liability. However, if an asset is sold, taxes will be applied on the capital gained. For example, you may have to pay capital gains taxes if you sell your marital home.
Meticulous accounting and strong strategy are necessary if you plan to liquidate any of the assets you acquire during divorce. Without proper planning, you may end up with a much larger tax burden than you had expected — and therefore effectively less of the marital state than you deserve.
Stock Options
The tax liability of stock options is a complex area and depends on whether they are qualified. If you are receiving assets in this category, our attorneys will assist you in understanding the impact of taxes on stock options will have on your divorce settlement.
In general, the exercise of QSOs is taxed at the capital gains rate and that of NQSOs is taxed at ordinary income rates. However, the reason for which the stock options were granted could exclude them from the marital estate altogether, rendering it unnecessary to make this determination at all.
Please note that not a subject that typically benefits from general discussions. Please contact us to go over your compensation plan and get your options.
Retirement Accounts
The IRS has special rules for splitting retirement accounts, such as pensions, IRAs, Roth IRAs, 401(k) plans, and 403(b) plans in a divorce. The bottom line is simple: You are likely to face significant taxes and penalties if you cash out your accounts.
Typically, the procedure involves a rollover. For example, you might take funds from your 401(k) and roll them over into an IRA for your spouse. This would not incur the early withdrawal penalty if you did it properly.
However, you may other plans. The retirement assets you receive from your spouse during a divorce could potentially be used elsewhere if you see a once-in-a-lifetime investment opportunity for those funds. Regardless of your goals, we will advise you so as to complete them while minimizing your tax burden and maximizing your long-term financial stability.
Filing Status
Will you file jointly or as a single person this year? Your tax filing status may be significantly affected depending on the time of the year and the timing of your divorce.
If your divorce has been finalized at the end of the year, you will have to file as either the head of the household or single. If the court has not yet approved your divorce decree by that time, you have the option to file as married or married filing separately.
Making the right choice now should prevent many headaches down the road. These deadlines tend to approach more quickly than you expect, so please be proactive if at all possible.
Talk to an Experienced Divorce Tax Implication Attorney Today
Divorce can give rise to several confusing questions regarding the impact of tax on different settlement matters. Should you roll over that 401(k) disbursement into your IRA? Should you sell your home, or sell those stocks? How does income from property division get calculated on your upcoming federal tax return?
These answers are best given on a case-by-case basis. In short, you need an attorney.
Whether you want to know about the tax implications of property division or your rights for a dependency exemption (a law that changed recently), our reliable attorneys can provide skilled counsel to help you make informed decisions. Contact the Law Office of Fedor Kozlov, P.C., today at (847) 241-1299 to schedule a consultation with one of our experienced attorneys and discuss your case.