Tax issues related to divorce might take couples by surprise, especially when they are financially set. Couples in Illinois and elsewhere need to keep several things in mind when dividing their assets at the end of a marriage.
First, state law determines how assets are handled during a divorce. In community property states, both parties own any assets that were gained during the marriage and will need to divide those in half. One the other hand, any property that was brought into the marriage by a spouse or specifically given to them during the union belongs to that person alone. Other states have rules that the couple must divide their assets according to what the court deems is fair. While this may result in a 50/50 split, that is not necessarily the case. Both parties can work out what they feel is fair, and the courts will usually agree to it.
When considering federal taxes, most assets can be split up between two spouses without any tax liability. The spouse who then takes over ownership of the asset or property will be responsible for the payment of capital gains taxes from a sale after the transfer takes place. The transfers can happen before the divorce is final, at the time it’s finalized and even within six years after the divorce as long as they are included as part of the separation agreement. When an asset appreciates and is sold, the spouse who ends up with it must pay the taxes on it.
The tax implications of a divorce can be complicated and challenging to navigate. A family lawyer might be able to help clients determine the best way to divide property.
Source: Market Watch, “What’s even worse than divorce? The taxes“, Bill Bischoff, December 03, 2013