Five Ways Divorce Could Impact Your Taxes

 Posted on December 10, 2024 in Illinois Divorce

Divorce can bring significant changes to your financial life, including how you file and pay taxes. These changes might seem overwhelming, but understanding how they work can help you prepare and avoid surprises during tax season. A knowledgeable Illinois divorce attorney can explain how divorce will affect your taxes and help you take the right steps to protect your finances.

Filing Status Changes

Your tax filing status is based on whether you are married or single on December 31 of the tax year. If your divorce is finalized by that date, you must file as "Single" or, if you qualify, "Head of Household."

The "Head of Household" status offers tax benefits like lower rates and a higher standard deduction. However, to qualify, you must have paid more than half the costs of maintaining a home for yourself and a dependent, such as a child. Filing as "Single" may result in higher tax rates and smaller deductions, so knowing your filing status early can help you plan.

Division of Property

When a couple divorces, they need to divide their assets, such as homes, cars, and investments. These transfers are usually tax-free if they are part of a divorce settlement. However, selling an asset, like a house, may result in capital gains taxes.

Capital gains taxes are taxes you pay on the profit from selling something for more than you originally paid. For example, if you and your spouse sell your home after a divorce, you may owe taxes on any profit beyond the IRS exemption. Understanding these rules can help you decide whether to sell or keep certain assets.

Tax Deductions and Credits

Divorce can change who can claim certain tax deductions and credits. For example:

• Dependent Tax Credits: Only one parent can claim the Child Tax Credit or other dependent-related tax benefits. This is usually decided in the divorce agreement.

• Alimony Payments: If you pay alimony (financial support to your former spouse), you cannot deduct it on your taxes for divorces finalized after 2018. Similarly, if you receive alimony, it is no longer taxable income.

Retirement Accounts

Dividing retirement accounts in a divorce can have tax consequences. Many couples use a Qualified Domestic Relations Order (QDRO) to split retirement accounts without penalties. Without a QDRO, withdrawals from certain accounts may be subject to taxes and early withdrawal penalties. An attorney or financial professional can help you understand how to handle these assets correctly.

Tax Withholding Adjustments

After a divorce, your income and tax filing status may change, which means you should update your tax withholding. Withholding is the amount of money your employer takes from your paycheck to pay taxes. If you do not adjust your withholding, you could owe money when filing your tax return or face penalties for underpayment.

Contact a Kane County, IL Family Law Attorney

Divorce can affect your taxes in ways that might not be obvious. Working with a St. Charles, IL divorce lawyer at Weiler & Associates, Inc. can help you address these issues and ensure your finances are in order throughout the divorce process and into the future. Call 630-331-9110 today to schedule a private consultation and get the guidance you need.