5 Important Tax Considerations in a Divorce Decree


One of the most overlooked areas in a divorce decree is the tax implications of the agreement. Family Law Attorneys are not ethically able to give tax advice in Illinois, which is why clients are often encouraged to speak to their accountant regarding the tax implications of a divorce decree. However, there are general, important tax considerations in a divorce decree and how they can impact your agreement. These repercussions need to be considered during the negotiation stage. Clients can severely undermine the use of an accountant in the early stages of divorce negotiations. This blog is intended to outline some of the more important areas to pay attention to in a divorce decree, relative to taxes.

5 Key Tax Considerations in a Divorce Decree

1. The Child Dependency Exemption/Child Care Tax Credit

Divorcing parties generally know that whoever claims their eligible children on their income tax returns can receive a larger income tax refund. Sometimes parties will choose to alternate the years in which one party can claim the children. Other parties will divide their children up and say person A can claim Mary and Joey in all years and person B can claim Daniel and Margo in all years.

There are many different ways to allocate child dependency exemptions. People can really fight hard over these issues. However, it makes sense to talk to an accountant about who would benefit most from claiming the children. It also makes sense to see how claiming the children can affect your bottom line child support obligation.

Remember, if a person claims the children on their taxes, that increases their income, which means they have more money to pay support. It is a numbers game. Someone could fight hard for the dependency exemption only to then turn around and pay more in support because of it (though usually, the amount is pretty nominal overall, for many people). These are both important things to consider prior to spending time and money arguing over who will claim the children in which years.

2. Taxes Relative to Child Support

In Illinois, child support is calculated using the two parties’ respective net income (which is their income after taxes). Child support is not taxable to the person receiving it, and it is not deductible by the person paying it, at least pursuant to current Illinois law. Child support money is received by the obligee without any concern about it being taxes.

3. Awards of Cash or Property in a Divorce Decree

Cash and property received pursuant to a Divorce Decree is not taxable to the person receiving it and is not deductible by the person paying it. The money and property owned by two parties are presumed to have been earned by them, and thus, they have already paid taxes on it. They paid taxes on it at the time it was earned or received. Thus, when they are divorcing, there is no tax when transferring the property or cash from one of the parties to another. This can be thought of as changing the title to the property; one person is essentially removing their name from it. The other person is retaining what they already owned a share of.

Some property settlements, which are tax-free, can trigger "recapture" and cause an IRS audit, as well as back taxes. This happens when the property settlement appears to be spousal maintenance, but it wasn’t called maintenance, and thus wasn’t taxed. For property settlement awards, it is important to make sure the amount paid per year won’t cause recapture to occur. This is something to speak to an accountant about to try and avoid any sort of messy unintended tax consequences.

4. Maintenance or Spousal Support (formerly known as Alimony) in a Divorce Decree

After December of 2018, maintenance will no longer be deductible by the payor and taxable by the payee. This is a concerning time in Illinois regarding the issue of maintenance and the changes in the IRS code because Illinois statutory guidelines provide for spousal support to be calculated using gross (pre-tax) figures, and presumes that those sums will be taxable to the person receiving it and deductible by the person paying it. If this is no longer the case, then the Illinois guidelines for maintenance as currently written could cause maintenance awards that are higher than what the Illinois legislature ever intended. There is, however, some judicial discretion allowed under Illinois statutes regarding calculating maintenance, in the meantime, until the issue can be addressed. We will continue to blog future posts regarding changes to this particular issue as they come about.

5. Attorney’s Fees Awarded in a Divorce Decree

Monies received by a party as a contribution to their attorney’s fees and costs are not taxable in a divorce decree. These monies are marital monies that are being divided between the parties and thus are not subject to a tax under Illinois law. They just so happen to be used for paying down one of the parties’ debts.

Consult a Chicago Divorce Attorney About Tax Considerations in a Divorce Decree

Overall, divorce decrees have many tax consequences. Some are intended, some can be unintended. It is very important to work with a knowledgeable divorce attorney and accountant in crafting your divorce decree to ensure there aren’t any unintended surprises.

The attorneys at Anderson & Boback have in-depth experience in all aspects of divorce and family law including addressing tax considerations in a divorce decree. Please contact Jessica Marshall at Anderson & Boback for questions about this topic and other questions related to Illinois divorce or family law.

THIS ARTICLE WAS PREVIOUSLY PUBLISHED AT: https://illinoislawforyou.com/divorce/tax-considerations-in-a-divorce-decree/

Comments

Post a Comment

Popular posts from this blog

When Divorced Parents Disagree About the COVID-19 Vaccine 

Image
  There is a lot of disagreement about vaccinations for children and the argument between parents with differing views on this subject is not a new one.  Illinois family law attorneys representing parents in this type of disagreement have worked throughout the years to avoid the problem in its entirety by addressing the issue of vaccination in the parenting agreement, now called an Allocation Judgment.  A prior agreement on how to handle vaccinations will give clarity as parents deal with the COVID-19 vaccine.   COVID-19 Vaccine Questions from Divorced Parents There are a number of questions and co-parenting issues surrounding the COVID-19 vaccine. Here are five of the most frequently asked questions we are seeing in our Chicago family law practice: 1. What If the Other Parent Will Not Get the COVID-19 Vaccine? We just saw a judge in Cook County strip a mother of her parenting time because she had not received the COVID-19 vaccine.  The parents were before...
Read more

Illinois Law Update – Can a Guardian Ad Litem Speak to a Therapist in My Case?

Image
The Illinois Marriage and Dissolution of Marriage Act in recent years gave the courts in Illinois the authority to order therapy for a minor child, family counseling for one or more of the parties and the child, or parental education for one or more of the parties if it finds that the parents or all parties agree, that the child’s physical health is endangered or that the child’s emotional development is impaired, or that an abuse of allocated parenting time has occurred, or, one or both of the parties violated the judgment with regard to conduct affecting or in the presence of the minor child.  {See 750 ILCS 5/607.6 regarding same}.  However, the same statute previously explicitly indicated that all therapy would be confidential. As of August 13, 2021, Illinois enacted Public Act 102-349, and the statute is now modified.  It no longer has a provision stating that therapy would be strictly confidential.  This kept all information obtained by a Guardian Ad Litem fro...
Read more

Changes to the Illinois Child Relocation Statute in Family Law for 2022

Image
  Oftentimes while a family law case is pending, parents will need or want to move with their minor children . The child relocation law in Illinois as of 2021 indicated that you need to seek approval for relocation from the Court if you want to move your minor child(ren) more than 25 miles away from their current residence. However, under the Illinois statute, as written in 2021, it indicates that “a parent who has been allocated a majority of parenting time or either parent who has been allocated equal parenting time may seek to relocate with a child.”  Judges and attorneys have interpreted this section to mean that until a parenting time schedule is in place, a parent cannot seek relocation, because it is unknown if that parent has the “majority” of parenting time or “equal” parenting time, until, at a minimum, there is a parenting time schedule in a custody order.  New Temporary Child Relocation Law Many Judges have also been interpreting the child relocation law to ...
Read more