CHICAGO, IL – Divorce proceedings involving substantial assets can carry significant tax consequences that affect how much each spouse retains after a settlement is finalized. Chicago high net worth divorce attorney Michael Ian Bender of Caesar & Bender, LLP (https://www.caesarbenderlaw.com/blog/tax-consequences-high-net-worth-divorce-illinois/) explains how property division, retirement account transfers, spousal maintenance, and changes in filing status can create unexpected tax obligations for divorcing spouses in Illinois.
According to Chicago high net worth divorce attorney Michael Ian Bender, property transfers between spouses incident to a divorce are generally not taxable events under Internal Revenue Code Section 1041. However, the receiving spouse inherits the original tax basis of the transferred asset, which means appreciated assets may carry significant hidden tax liabilities. “An asset worth one million dollars on paper may be worth considerably less after accounting for capital gains taxes, depreciation recapture, or early withdrawal penalties,” explains Bender. “Evaluating each asset’s after-tax value rather than its face value is essential during settlement negotiations.”
Chicago high net worth divorce attorney Michael Ian Bender notes that Illinois follows an equitable distribution model under the Illinois Marriage and Dissolution of Marriage Act, specifically 750 ILCS 5/503(d), which requires courts to divide marital property in just proportions based on twelve statutory factors. One of those factors specifically addresses the tax consequences of the property division upon the respective economic circumstances of the parties. For high-income earners, the combined federal and Illinois tax on long-term capital gains can approach 29 percent when factoring in the 3.8 percent Net Investment Income Tax and the state’s 4.95 percent individual income tax rate.
Attorney Bender highlights that the marital home often represents one of the largest assets in a Chicago divorce. Under IRC Section 121, homeowners may exclude up to $250,000 in capital gains from the sale of a primary residence when filing as single, or up to $500,000 when married and filing jointly. “Timing matters significantly in a high-asset divorce,” Bender advises. “If the couple sells the home before the divorce is finalized and files a joint return, they may qualify for the full exclusion, but if one spouse keeps the home and sells it afterward, the exclusion drops to $250,000.”
Retirement accounts are among the most common high-value assets in a divorce, and the firm notes that improper handling can trigger immediate tax consequences and penalties. Employer-sponsored plans such as 401(k)s and pensions require division through a Qualified Domestic Relations Order, which allows a tax-free transfer when properly executed. Individual Retirement Accounts do not require a QDRO but must be divided through a direct trustee-to-trustee transfer to avoid taxation and early withdrawal penalties for recipients under age 59½.
The team at Caesar & Bender, LLP also addresses changes to spousal maintenance under the Tax Cuts and Jobs Act of 2017. For all divorce agreements executed after December 31, 2018, maintenance payments are no longer tax-deductible for the paying spouse and are not considered taxable income for the receiving spouse. Under Illinois law, 750 ILCS 5/504 provides a guideline formula for calculating maintenance when combined gross income falls below $500,000, but in high net worth cases where combined income exceeds that threshold, the court has broad discretion to set the amount and duration. “Because maintenance is no longer deductible, high-income spouses may want to consider alternative settlement structures such as lump-sum property transfers or creative asset division that achieve similar financial outcomes with greater tax efficiency,” notes Bender.
Attorney Molly E. Caesar adds that business ownership introduces additional layers of complexity to high-asset divorce proceedings. Stock options, restricted stock units, and deferred compensation earned during the marriage are often treated as marital property under Illinois law. The tax treatment of these instruments depends on when options are exercised, the type of option, and whether the exercise triggers ordinary income or capital gains treatment. “A business valued at five million dollars may carry a much lower after-tax value if a significant portion of its assets have a low tax basis or if selling would trigger substantial capital gains,” Caesar explains.
Beyond property division and maintenance, several additional tax considerations require attention during and after a high net worth divorce. Filing status changes on December 31 determine tax obligations for the entire year, and losing access to married filing jointly brackets can result in thousands of dollars in additional federal tax liability. Child-related tax benefits, joint return liabilities, and estate planning documents all require careful review to prevent costly outcomes. For those navigating the financial complexities of a high-asset divorce, consulting with an experienced family law attorney may help protect long-term financial interests.
About Caesar & Bender, LLP:
Caesar & Bender, LLP is a Chicago-based law firm focused on high net worth divorce and complex family law matters. Led by attorneys Michael Ian Bender, a former Domestic Relations Judge for the Circuit Court of Cook County, and Molly E. Caesar, an Adjunct Professor at DePaul University College of Law, the firm serves families across Chicago and Cook County. For consultations, call (312) 236-1500.
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Website: https://www.caesarbenderlaw.com/
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Company Name: Caesar & Bender, LLP
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Phone: (312) 236-1500
Address:150 N Michigan Ave #2130
City: Chicago
State: IL 60601
Country: United States
Website: https://www.caesarbenderlaw.com/