How do taxes impact my divorce settlement in IL?

By Heather Locus
November 28, 2013
IL FAQ/Legal Issues

All assets are not equal in a divorce settlement. Retirement accounts have embedded tax liability and a $100,000 IRA may only be worth $75,000 after taxes while a $100,000 investment account may have a $90,000 tax basis and be worth $98,000 after taxes. Anyone going through a divorce should be aware of the impact of taxes when analyzing a proposed settlement.

  • For a sale of a principal residence, taxpayers can exclude $250,000 per person if they owned and used the house for 2 of the last 5 years. A non-occupying spouse can include the use of an occupying spouse if it is pursuant to a divorce decree.
  • Retirement account splits pursuant to a QDRO are exempt from 10% penalty on withdrawals before age 59 1/2 but IRA withdrawals are not.
  • Taxable maintenance will qualify as 'earned income' for IRA/Roth IRA contribution qualification.
  • Legal fees paid to obtain taxable maintenance or for tax research and advice qualify as miscellaneous itemized deductions on Schedule A.
  • Contributions to 529 Plans for college may have tax benefits. In Illinois, contributions to Bright Start and Bright Directions qualify for deduction up to $10,000 per taxpayer. The 5% Illinois tax rate makes that worth $500.

It is important to calculate the basis and taxable gain on securities in valuing assets and determine how any loss carry-forwards will be allocated. It is also important to address how a tax refund will be split.

Tax planning is crucial during the divorce process. Accurate tax estimates will help ensure you get an equitable settlement and alert you if quarterly payments are due so you avoid unnecessary penalties.

Heather Locus is a principal at Balasa Dinverno Foltz LLC, a fee-only wealth management firm with approximately $2.5 Billion under management. Heather is passionate about helping women make smart financial decisions so they can enjoy their wealth. As an owner and leader of BDF's Women's Service Team, Heather provides financial guidance to divorcees and business owners before, during and after the challenging transitions in their lives. Visit her firm website.

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November 28, 2013
Categories:  Financial Issues|FAQs

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