Divorce is complicated — particularly for high net worth couples. If you and your spouse are preparing for divorce, it is crucial you take proactive steps to protect your legal rights and financial interests. Among other things, this means planning for the potential tax consequences of a marital separation. Here, our Illinois high net worth divorce lawyers highlight five common tax issues you should be ready to address.
1. Change of Your Filing Status
A divorce is likely to change your filing status. You and your former partner will no longer be able to file a joint return. Moving forward, it is important to make sure you understand the implications of your filing status and adjust your withholdings accordingly.
2. The Liquidation of Valuable Assets (Possible Capital Gains Taxes)
In some cases, high net worth divorcing couples end up liquidating property and assets. When doing so, you need to be careful. Liquidation of an asset could trigger capital gains tax liability. In some cases, there are options available to limit the impact of capital gains taxes. Do not sell the family home without first speaking to a divorce lawyer.
3. Child Tax Credits and Related Exemptions
If you have young children, you and your spouse will need to determine who gets to take child tax credits and any child-related tax exemptions moving forward. According to the Internal Revenue Service (IRS), a child can only be claimed by one taxpayer in a given tax year.
As a rule, the parent with primary physical custody has the first right to claim a child as a dependent. However, an attorney will advise for a divorcing couple to work out an arrangement where the higher income parent claims the children. In some cases, this can produce additional tax savings.
4. Division of Retirement Accounts and Retirement Benefits
If you have a tax advantaged retirement savings account such as an IRA, a 401(k), etc., you need to be extremely careful when dividing the proceeds as part of a divorce. Make sure you protect your nest egg. The last thing you want to do is get hit with an early withdrawal penalty. An experienced Illinois high net worth divorce attorney can help you set up a qualified domestic relations order (QDRO), which permits you to divide retirement holdings without incurring tax penalties.
5. Taxation of Spousal Support (Alimony)
Spousal support is often an issue in high net worth divorce cases. When negotiating a settlement, it is important to consider the tax implications of spousal support. Notably, the Tax Cuts and Jobs Act (TCJA) changed the way in which spousal support is taxed. These payments are no longer tax deductible for the payor, nor are they reportable income for the receiver.
Call Our Illinois High Net Worth Divorce Lawyers for Immediate Assistance
At Keller Legal Services, our Illinois divorce attorneys are skilled, diligent advocates for our clients. High net worth couples going through a divorce need savvy financial representation. To request a free, completely confidential divorce consultation, please contact us today. With law offices in Naperville, Aurora and Bolingbrook, we serve communities throughout the entire region, including in Schaumburg, Elgin, Bolingbrook, Orland Park and Joliet.