Did you know that you may owe income tax on money you receive in your divorce? It’s true, and whether you must pay tax depends on why you are receiving money in your divorce case.
Under Federal and Illinois state law, you are only taxed on money you receive as ‘income.’ When property is divided between two divorcing spouses, there is no value created, meaning neither party has income. That means, if you receive money from the division of the things you and your spouse owned together, you do not need to pay income tax on that money.
You may also be familiar with Spousal Maintenance, which was formerly known in Illinois as Alimony. Spousal Maintenance payments are considered income to the party receiving them, and he or she must report those payments as income at the end of the year and pay income taxes for them. On the other hand, if you are making Spousal Maintenance payments, be sure to tell your tax preparer. Those payments are tax deductible!
Child support is a special case. In Illinois, the divorcing spouse who has the children most of the time receives child support from the other spouse. However, child support payments are intended to be for the benefit of the minor children, and are not considered income to the party receiving child support. Therefore, the spouse who receives child support does not pay tax on those payments, and the spouse who pays child support cannot deduct those payments from his or her taxes.
When you are undergoing divorce, it is important to consider all of the financial issues with an experienced and knowledgeable counsel. Trust the Illinois divorce attorneys at the Law Offices of Van A. Schwab. We focus our practice specifically on divorce and family law in order to provide clients with the best possible legal representation.