What You Need to Know about Taxes and Divorce: Part I
Filing taxes is a process that can quickly become complicated, particularly if someone divorced during the tax year. Generally, the rules for divorced taxpayers have not changed much over the past few years; however, divorce has, with changes in the way property and custody is divided. This makes figuring out what a person owes in taxes more complicated than ever. Time recently shared several tips to help those who are divorcing or already divorced when filing their taxes, which we will discuss in a two-part series.
For marriage status, follow the calendar. Even if a person’s divorce was finalized in 2011, in regards to 2010 taxes, they are still considered married. However, if someone’s divorce was finalized in December, they are not able to file as married, even if they were married for the majority of the year.
There is a third status someone can claim if they are in the middle of a divorce called “head of household.” Certain qualifications must be met, including living apart from a spouse for the last six months of the tax year and being able to claim a child as a dependent.
A person generally does not have to pay income taxes on assets that are transferred during their divorce. Capital gains tax may apply to assets that are sold, whether during or after the divorce. For example, if you end up getting the house in the split, it may not be tax-free, as capital gains taxes can come into play. These taxes apply even to a person who has recently divorced and if they decide to sell the home after the divorce is finalized. Typically, a married couple does not have to pay taxes on gains up to $500,000 on a primary residence. However, when someone divorces, they are only able to exempt half that amount, so if a house is sold for over $250,000 than what they and their former spouse paid (including the cost of improvements), they will owe taxes on the proceeds of sale. If someone has recently divorced and moved out of the residence before the divorce was finalized and then ended up getting the house after proceedings, they are able to claim the house as their primary residence, which can change what taxes are due, if any.
The decision to divorce in Illinois can be an overwhelming one, and one that many people don’t fully understand the repercussions of. Whether you have questions about the impact divorce will have on your retirement accounts or are wondering how property division or bankruptcy in divorce will influence the process, the Chicago divorce attorneys at Nottage and Ward can help. To see if our experience matches your needs, call 312-332-2915 today.
Go here to read: What You Need to Know about Taxes and Divorce: Part II
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