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If you are currently separated and considering divorce in Illinois, questions on how this decision may affect your federal income tax return may cross your mind.
As per Kiplinger’s, a Washington, D.C. based publisher of forecasts covering business to personal finance, there are several options available for newly separated Illinois couples beginning the dissolution of marriage process.
To ensure fairness and accuracy of a final joint return, Kiplinger’s offers the following tax planning tips to avoid emotional and financial turmoil.
For Illinois couples who are separated but have yet to finalize their divorce, the option for filing a joint return is still viable as long as the marital status was still intact as of December 31 of the calendar year.
After the final divorce decree is issued, options for consecutive tax years can include filing as head of household, which may provide a larger standard deduction and a lesser tax bracket but only if a dependent was in the home for six months or more and overall responsibility for the upkeep of the home was evident.
For the custodial parent, all dependents in all probability will continue to be eligible for tax exemption status but it is possible for the noncustodial parent to claim the exemption(s) if the custodial parent signs a waiver pledging that the exemption will not be claimed.
Kiplinger’s reminds custodial parents claiming dependents to research the child credit or the American Opportunity or Lifetime Learning Credit if one or more dependents is enrolled in college.
If a non-custodial parent continues to pay medical expenses for a dependent following the divorce, these deductions can be reported on the Form IL-1040.
Child Care Credit
Child care credit for care or work-related expenses incurred can be claimed for a dependent under the age of 13 even if a spouse claims the dependent exemption.
Continual Maintenance Support
If responsible for spousal support, payments are applicable as a tax deduction, even if a schedule of itemized deductions is not drafted. The one caveat is that the IRS will not consider these payments unless it is written into the final divorce decree.
It is also important to remember that the spouse receiving support will be liable for income tax on the amount received.
Transfer of Assets
If a divorce settlement shifts property or assets from one spouse to the other, the recipient is not required to pay tax on the transfer, although if sold at a later date the property holder will be subject to the capital gains tax.
Transfer of Retirement Assets
Kiplinger’s suggests this area be approached with care. All actions should be clearly defined in the final divorce decree to avoid any tax penalty if perhaps a 401(k) plan was cashed out and funds were allocated directly to the other spouse. The best way to avoid this, opt to transfer the amount under a Qualified Domestic Relations Order (QDRO).
Sale of a Home
During consultations with each respective Illinois divorce attorney, each spouse should broach the tax ramifications of selling real property due to capital gains tax implications. In most instances, the law provides tax avoidance on the first $250,000 due to sale of a primary residence with regard to the division of property.
For divorcing couples still eligible for joint filing status, up to $500,000 can be excluded as long as either spouse has owned the residence and both has used it as the primary home for at least two out of the past five years.
Following divorce, if the property is sold, each spouse can exclude $125,000 of the capital gains tax requirement.
If you are currently separated and wish to petition for divorce, the qualified Hinsdale divorce attorneys of Martoccio & Martoccio understand the many questions you may have. From our Hinsdale office we serve Illinois clients throughout DuPage, Cook, Kane, Kendall and Will counties. Contact our office today to schedule your free consultation.