It’s not just the emotional turmoil and vitriol among loved ones that makes divorce such a challenging experience for Illinois families. It’s also a massive administrative undertaking that requires two often aggressively opposing sides to somehow negotiate the dissolution of a multi-faceted asset structure that’s been built over years or even decades.
What happens to your 401(k)? Can you divide it without suffering the tax penalties of making withdrawals before the government-mandated age threshold?
What happens to your home? Do you sell it together and split the equity? Does one spouse remain in the home while the other finds other living accommodations?
There are similar questions to be asked about investments, business assets and the division of any type of property that may be liquidated during the course of a divorce.
Keep in Mind Illinois Is a Common Law State
Both parties won’t necessarily face the same tax burden in Illinois, as it is a common law state. In community law states, like most of the West Coast and Southwest, the courts view all property as jointly owned 50/50. In common law states a myriad of factors is analyzed to divide assets equitably, not necessarily equally, a concept sometimes referred to as just proportions.
You may think that would unfairly favor the breadwinner in most circumstances, but judges make these decisions based on more than just who earned what when. They also look at non-financial contributions, the length of the marriage, debt, if one party was especially irresponsible with their joint assets, health, children, and much more. Being the primary homemaker and spouse with primary child-rearing responsibilities can weigh heavily in that equation.
Deductions, Exemptions, and Credits
While taxes on the sales of assets is a relatively immediate consequence related to divorce, there are other long-term effects that could have far-reaching implications. Take for example mortgage deductions or child tax credits. Which parent will be claiming the children as dependents? Will the spouse keeping the home and the mortgage have to sacrifice something else to make his or her extra mortgage deduction equitable? Parenting time, decision-making responsibilities and child support may also potentially carry tax implications for your yearly filings.
It’s not entirely uncommon for couples to meet with a financial specialist, a CPA or a divorce attorney experienced in the tax implications of divorce prior to formalizing the dissolution of their marriage. There may be tax benefits to filing jointly. For example, you could both benefit from the deductions, exemptions, and credits from owning a home or having children. Even in less than cordial divorce proceedings, parties should realize that the financial success of their spouse also means more success for them in many circumstances, and a financial or divorce professional can help you determine whether or not it’s worth it in your situation.
Despite the potential benefits of filing jointly even during the divorce process, it’s not the best course of action in every situation. If one spouse was financially irresponsible and owes back taxes to the IRS, there could be adverse consequences resulting from a joint filing. There also may be financial advantages to both spouses in filing separately if one spouse is paying spousal maintenance to the other spouse during the divorce process. However, after the divorce, the parties must file separate tax returns for the calendar year in which a judgment for dissolution of marriage is entered.
When you start to consider divorce, It’s in your best interest to consult with a divorce attorney or CPA before you decide exactly how you’re going to move forward filing your taxes.
Is It Worth Getting a Financial Specialist or a CPA Involved?
The answer to this question has much to do with the complexity of your marital estate and assets. In high-net worth divorces where there are various types of assets, there’s often a need for forensic accounting to truly map out the entirety of those assets.
There are also questions of valuation to consider, which can have significant tax implications. It’s not too difficult to ascertain the value of a bank account, but when it comes to real estate or privately owned business ventures, accurate valuation isn’t always a simple process.
In addition to hunting down and analyzing assets, financial specialists and CPAs can also assist with the minimization of tax impact as an element of the division of assets. Parties have the option of each retaining his or her own CPA or financial specialist, or, alternatively, hiring a financial neutral CPA or financial specialist. A neutral financial specialist can facilitate mediation or negotiation between the parties and resolve unnecessary misunderstandings. The financial neutral can be a CPA or a CFP (a certified financial planner), and is the preferred approach for divorcing couples who would rather resolve their differences through the Collaborative Law Process, or through an amicable and respectful negotiation process.
Speak with an Attorney to Discuss the Tax Ramifications of Your Divorce
If you are considering divorce you’ve likely thought about how the financial ramifications will affect your family and lifestyle. Our experienced divorce attorneys have helped clients through a truly diverse array of marriage dissolution scenarios, including many high-net-worth divorces with complex asset division issues and tax ramifications. Contact Conniff Law Offices at 312-880-0377 to schedule a consultation and discuss your situation.