What are the Tax Implications of a Business in a High Net Worth Divorce?
For most business owners, work and life balance is a myth. Unfortunately, the long hours, stress, and lack of sleep places immense strain on their marriages and other relationships. If you are forced to choose between your business and your spouse, chances are you will choose the former and will have to deal with a high net worth divorce.
However, your impending divorce may have some profound financial implications on your finances. At this point, you should consider hiring a high net worth divorce lawyer in Chicago to protect your company as well as your future.
What Is A High Net Worth Divorce?
A high net worth divorce is one that involves more than $1 million in liquid assets. These can include property, business shares, vehicles, and other costly assets that you may accumulate throughout your marriage and through your business income. The higher the values of said assets, the more complex the high net worth divorce.
Tax Implications Of A Business In A High Net Worth Divorce
Since you own a business, a high net worth divorce lawyer in Chicago will prove to be invaluable when you need to figure out how taxes apply to your business during the asset division process. This includes the income that it will earn on an ongoing basis.
Illinois is an equitable distribution state, and it recognizes marital and non-marital property. If you started your business before you got married, your spouse may or may not be eligible for a cut. However, if you started your company after getting married, it will be considered as marital property, and your spouse can qualify for more than half of the entire enterprise.
The Importance Of A Business Valuation
In case of the latter, the court will ask for a complete valuation of your business. During this time, you will also need to determine how taxes apply to your enterprise, as it will affect the decisions made during the valuation process. This includes the income the business will generate post-divorce and its distribution between spouses.
A high net worth divorce lawyer in Chicago, who is proficient in business valuations can drive your business interests in a manner that can help you meet your goals. It is an essential step in determining the value of a business and any other marital asset during a high net worth divorce.
A proper business valuation usually involves a detailed examination of a business’s tangible assets such as:
- Accounts receivable
A business valuation also determines intangible assets such as:
The process is highly subjective and can lead to several contentious disputes during a high net worth divorce. An experienced and knowledgeable high net worth divorce lawyer in Chicago can work from a position of strength during complex negotiation processes or during litigation.
Understanding Tax Implications
Here are some of the tax implications that you should consider from your high net worth divorce:
Filing Tax Returns Jointly
Once your high net worth divorce is finalized, you don’t have to file taxes together with your spouse. However, you should consider filing jointly if you are still married in the year(s) before the divorce rather than filing independently immediately. If you consider that option, make sure that you figure out who will be responsible for paying outstanding taxes and how tax refunds will be distributed.
When you file as a single person following your divorce, you need to make several adjustments. For example, you may need to go over the exemptions and deductions you may be eligible for and the best strategies that can reduce your tax burden.
By working with an experienced accountant, you can fully understand your business and family finances and avoid potential tax liabilities in the future.
For instance, if you decide to sell off specific property, you may be required to pay capital gains taxes for them. Similarly, you should also be aware of the credits and deductions that may be claimed since these can affect your income during child and spousal support deliberations. This also includes child custody and parenting time.
If you don’t want to file jointly before the divorce is finalized, you can file as ‘head of household’ or ‘married filing separately.’ You may not be eligible to file as head of household, depending on your living situation. If you prefer to file separately while married, you may not get the same types of tax benefits. However, married filing separately is a good option if you suspect fraudulent behavior from your spouse.
Dependent Tax Implications and Exemptions
If you have custody of your children or any dependents, here are the tax implications you can expect:
- Dependents are eligible for tax exemption. However, the non-custodial parent may claim exemptions if you sign a waiver that claims otherwise. However, even if a spouse claims exemption, child care credit for care or work-related expenses can still be claimed for a dependent who is 13 years of age or younger. To ensure both you and the non-custodial parent can get maximum tax benefits, you can negotiate a suitable arrangement.
- If the non-custodial parent continues to take care of medical expenses for a dependent even after the divorce is finalized, they can report deductions in Form IL-1040.
Taxes on Alimony
As of 2019, payors cannot deduct alimony payments, and recipients don’t have to pay taxes on spousal support in Illinois. If you are responsible for spousal support, you can expect a reduction in payments, resulting in higher tax payments. However, you can come to an arrangement that can benefit you both. For example, you can give your spouse a large portion of the marital estate in place of spousal support payments or create a trust that will dole out payments to the recipient spouse.
Property and Capital Gains Taxes
Any property you own post-divorce will be subject to a tax. This includes vacation homes, marital homes, and real estate. As such, you should ensure your business can generate the finances necessary to pay off those taxes on an ongoing basis post-divorce.
Similarly, while taxes may not apply to assets that you give your spouse or vice versa, within the year the divorce is finalized, you can face capital gains taxes on stocks and real estate you sell off before or post-divorce. As such, you should determine who will be responsible for paying the taxes involved.
To determine whether taxes apply to retirement accounts such as your 401(k), you need to use a Qualified Domestic Relations Order (QDRO). It will also let you know if your spouse has to pay penalties on any withdrawals they make before they reach retirement age. You may also need to address the tax implications you and your spouse may face if you divide pension benefits or other retirement benefits in your plan.
Keep in mind that without a QDRO, all of the money transferred from your retirement plans to your ex-spouse is taxable, and you have to pay up. You may also have to pay the 10% early withdrawal fee on money that your ex withdraws before they reach retirement age.
In other words, without a QDRO, your ex-spouse can enjoy a tax-free windfall at your expense. With a QDRO, your ex will also be responsible for income taxes on retirement funds that they receive from account withdrawals, an annuity, or a pension.
If you want to avoid taxes and penalties, you can cash out your interest in the retirement plan and roll it over into another one, such as an IRA. Just make sure you do this within 60 days. The distribution will be tax-free if you do this on time.
Contact A High Net Worth Divorce Lawyer In Chicago To Reduce Tax Implications
The bottom line states that as a high net worth individual, you should expect profound tax implications pre and post-divorce. As a business owner, you would want to protect your organization’s future operations during and post-divorce. If your business grew in value during your marriage, your spouse might be eligible for a cut of the profits without the tax implications.
An experienced and knowledgeable high net worth divorce lawyer in Chicago can help you determine and take care of said implications in a way that can keep your business intact. That is where the legal team at the Law Office of Fedor Kozlov can prove invaluable. Our attorneys have a deep understanding of Illinois tax laws and implications associated with a high net worth divorce.
We understand that every extra dollar you pay to the IRS is money that your family cannot use. Plus, every asset that comes to you with a tax burden can compromise your future income and business opportunities. To ensure a fair and favorable divorce, we urge you to consider the tax implications you and your business can face during and after your divorce.
We aim to ensure your financial stability post-divorce. Get in touch with us today for reliable and honest counsel, along with the best strategies that can reduce your tax impact. We create strategies to protect your best interests and ensure that you don’t end up with the lion’s share of taxes across the marital estate. Get in touch with us for a consultation by dialing (847) 241-1299.