Dealing With Divorce Tax Issues in Time for the IRS Deadline
With the IRS tax filing deadline coming up later this month, it is time for recently divorced or soon-to-be divorcing spouses to become acquainted with the tax implications of divorce. While child support payments do not have any tax implications (that is, they are not tax-deductible for the paying parent, and they are not considered taxable income for the receiving parent), spousal maintenance (alimony) payments do. Whether you are paying or receiving spousal maintenance in Illinois, you need to account for it on your taxes.
Spousal Maintenance Is Tax Deductible for the Payor
If you are currently paying spousal maintenance to your ex-spouse, know that these support payments are tax deductible. As such, you may end up being required to pay less taxes than expected. Awareness of such positive tax implications should allow you to better plan your finances, whether you are budgeting in the short-term or saving and investing for the long-term.
Spousal Maintenance Is Taxable Income for the Recipient
If you are currently receiving spousal maintenance from your ex-spouse, know that the support payments constitute taxable income. Because of this, you may end up being required to pay more taxes than expected. Anticipating and accounting for this reality well in advance of the tax filing deadline can help you budget and plan your finances as so to avoid experiencing unexpected and stressful monetary burdens at tax time.
Changes to Taxes on Spousal Maintenance
The Tax Cuts and Jobs Act of 2017 has changed the way spousal maintenance is taxed, starting in 2019. For divorces finalized after December 31, 2018, maintenance will no longer be tax-deductible for the payor or taxable for the recipient. While this change will not affect tax returns for 2017, spouses who are considering divorce or have begun the divorce process should be aware of how this change could affect the taxes they pay following their divorce, and they may wish to complete their divorce prior to 2019 to take advantage of the current tax laws.
Children May Be Claimed As Dependents on a Tax Return
As you are probably already aware, children may be claimed as dependents on your taxes. However, former spouses cannot both claim a child as a dependent. If there are two children, though, one parent may claim one child on his or her taxes, and the other parent may claim the other child on their taxes. A divorce decree or judgment should specify how these exemptions will be divided between parents.
Additionally, for divorced parent scenarios in which one parent earns the vast majority of the income and the other fulfills a stay-at-home parenting role, it may be wise, with regard to tax implications, to consider an unallocated support arrangement in which child support and spousal maintenance are combined into one payment that is fully tax-deductible for the payor and taxable for the recipients.
The Division of Assets in a Divorce Has Tax Implications
Finally, a number of tax implications may follow from the division of assets that occurs during a divorce. The division of investment and retirement accounts, capital gains from the sale of real estate, and the partition of family-owned businesses are all examples of issues that may affect divorcing spouses’ taxes. If you completed your divorce in 2017, you should be aware of these issues when filing your tax return, and you may wish to work with an accountant to ensure that these factors have been accounted for.
If you need help understanding the tax implications of your divorce, the Law Offices of Nancy Kasko, LLC can work with you to reach a resolution that will protect your financial interests. Contact a Winfield divorce lawyer today at 630-836-8540 to arrange a free consultation.
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