Divorce is messy. It’s confusing, emotional and honestly, a lot of work. Unfortunately, sometimes it is a necessary evil. While there are many aspects that need to be addressed in a divorce, sometimes some go overlooked.
What are the overlooked aspects? Surprisingly… taxes. Nobody likes them, but they can be especially confusing during the course of a divorce. That’s why we’ve put together our most important tax considerations to look into when getting a divorce.
1. Property Settlements
Deciding to split your assets is necessary and sometimes the decision regarding property is an easy one. Whoever wants it can have it and if you both want it then it is either taken into litigation or discussed between lawyers. Unfortunately, it doesn’t end there.
There are a ton of tax ramifications that come with property settlements. Sometimes these are hidden and can hit the party who gains the asset with a huge tax consequence. Talk to a lawyer about any hidden taxes that may arise before allocating property.
2. Child Support
Since dependents are deductible, some people think that child support payments are deductable as well. Well, they’re not. The only person who can claim the children as dependent is whoever has primary allocation of parenting time and parenting responsibility, unless otherwise agreed upon in a written Judgment.
3. Head of Household
Head of households usually get more generosity when it comes to tax brackets and deductions. However, in order to gain this title, you need a separate tax return and you cannot have been living with your spouse for the last 6 months of the taxable year that you’re filing for. In addition, a “qualifying child” must have lived with you for more than 6 months of the year. It can be confusing, so contact a tax specialist if you have questions.
4. Retirement Assets
When you have joint retirement accounts, it can be a bit difficult during divorce. Mainly because of the 10% tax penalty that comes from withdrawing prior to a certain time. In order to avoid these fees, make sure that your transfer is done in accordance with the Qualified Domestic Relations Order (QDRO) or a Qualified Illinois Domestic Relations Order (QILDRO). This will allow you to surpass the penalty for early withdrawal, however, there is additional time and cost that goes into preparing these Orders, having them approved by a plan administrator and getting them entered in court.
Finally, the timing of your divorce matters. If you are legally married on the last taxable day of the year then you can still file as a married couple. The timing of your divorce has dramatic affects on your income tax liability as well as your refund. Talk to your lawyer to see what is the best option for you.
If you are confused about any of these considerations, or if you want more information, contact your lawyer or a tax specialist today.