Tax Refund

Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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What Happens To A Tax Refund In An Illinois Divorce?

Tax Refund

Tax refunds can be afterthought in an Illinois divorce. Maintenance, child support and the division of assets and debts will dwarf the money the at the U.S. government owes one or both parties to an Illinois divorce. Still, money is money and someone is going to get that last tax refund. So, who gets the tax refund in an Illinois divorce?

Filing Jointly During An Illinois Divorce

Spouses may file their taxes together and thus receive a joint tax refund.

“A husband and wife may make a single return jointly of income taxes under subtitle A, even though one of the spouses has neither gross income nor deductions” 26 U.S. Code § 6013(a)

But the year in which you get a divorce, a former couple cannot file their taxes jointly even if they were married for 364 days of that year (363 days during a leap year).

“[A]n individual who is legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married” 26 U.S. Code § 6013(d)(2)

If the parties elect to file separately, the tax refund owed to each party is still at issue in an Illinois divorce.

Division Of A Tax Refund In An Illinois Divorce

This final year’s tax refund and any other prior years’ tax refunds still owed or held by the parties can be handled in two ways: 1) the parties can agree amongst themselves how to allocate the tax refund or 2) the parties can ask the court to allocate the tax refund.

“The respective interests of the parties in the refund [can be] divided according to the agreement of the parties, or can be determined by the court in the absence of agreement of the parties.” In re Marriage of Orminston, 168 Ill. App. 3d 1016

If the parties agree how to distribute the tax refund and enter those terms in their Marital Settlement Agreement, the parties will be bound to distribute the tax refund as agreed. “[W]here the terms of an agreement are, in fact, set forth in the court’s judgment, the parties “shall be ordered to perform under such terms” (750 ILCS 5/502(d) (West 2014)) and the terms of an agreement set forth in the judgment “are enforceable as contract terms” (750 ILCS 5/502(e) (West 2014)).” In re Marriage of Watkins, 2017 IL App (3d) 160645

If the parties cannot agree as to the allocation of the tax refund, the parties must turn to the courts to resolve their dispute.

The question is whether a tax refund (whether filed jointly or singulalrly) is marital property or not during an Illinois divorce.

“”[M]arital property” means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)

“The right to [a tax] refund [accrues] during the parties’ marriage, and thus the refund should [be] treated as marital property.” In Re Marriage of Brooks 138 Ill. App.3d 252 (1985)

“Federal income tax refund, based upon income earned during the time the parties were married, is marital property subject to division. The Illinois Marriage and Dissolution of Marriage Act clearly provides that all property, including income, acquired by either spouse after marriage is marital property, irrespective of how title is held. The withheld tax payments were made after marriage and prior to dissolution with marital property. The refund represented a return by the Federal government of marital property to the parties.” In re Marriage of Orminston, 168 Ill. App. 3d 1016

Once an asset such as a tax refund is identified as marital property, an Illinois divorce court “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 5/503(d).

How does a marital tax refund get divided “in just proportions” during an Illinois divorce?

“When dividing marital property, trial courts are required to consider all relevant statutory factors which include the contribution of each party; the dissipation of assets by either party; the value of property assigned to each spouse; the duration of the marriage; the relevant economic conditions of each party; the obligations arising from prior marriages; the antenuptial agreements; the age, health, station and occupation of each party; the custody provisions of the children; the prospects of each spouse for future earnings; and the tax consequences” In re Marriage of Hahin, 644 NE 2d 4 – Ill: Appellate Court, 2nd Dist. 1994

The court will consider the above factors and then divide the marital property.

The tax refund’s money does not always get divided equally. Rather, in Illinois marital property can be divided “equitably” or fairly based on the circumstances of the parties.

“The Act does not require an equal division of marital property, but an equitable division” In re Marriage of Jones, 543 NE 2d 119 – Ill: Appellate Court, 1st Dist. 1989

No singular fact or statutory factor will be dispositive in regards to allocation of a tax refund. Just because one party to the divorce earned all the income and paid all the taxes does not mean that party gets the full refund in an Illinois divorce.

“The fact that only one spouse generated the income upon which the tax refund is based does not preclude the other spouse from entitlement to a portion or all of the refund.” In re Marriage of Orminston, 168 Ill. App. 3d 1016

“The touchstone of a proper apportionment is whether it is equitable, and each case rests on its own facts.” In re Marriage of Romano, 2012 IL App (2d) 091339

Tax refunds are issued after tax filings which occur months or years after the money was earned. As such, tax refunds are often treated as “found money” by both the parties and an Illinois divorce judge. As such, the tax refunds are often used to resolve other problems in the divorce such as joint marital debts. If the tax refund pays a joint marital debt, two problems are solved by the court: the tax refund’s apportionment and the joint marital debt’s apportionment. One or both of these issues will no longer exist after the court’s ruling.

If a tax refund isn’t used immediately to pay marital debts, the tax refund will be held in escrow until the divorce is finalized and all other matters regarding marital assets and debts are resolved.

So, if you want that tax refund money as cash in your hand and not just used to pay the debts your ex accrued, you will, most likely, need to come to an agreement with your ex regarding the tax refund.

Tax Refunds, Child Support And Maintenance In An Illinois Divorce

Finally, whichever party is awarded some or all of the tax refund will find that tax refund will modify their child support and or maintenance.

Child support and maintenance (formerly known as alimony) are both determined by the parties “net incomes.” Child support and maintenance have respective formulas which are computed based on both parties’ net incomes. If either party’s net income increases, the support they pay or receive will go up or down, respectively.

A tax refund is always an increase in net income.

“[A] tax refund…is to be considered part of “net income” under the Act.” In re Marriage of Pylawka, 661 NE 2d 505 – Ill: Appellate Court, 2nd Dist. 1996

Withholding extra money for taxes will not reduce a parent or former spouse’s obligation for support.

“If the noncustodial parent overwithholds on his W-2, thereby overpaying his Federal income tax, the amount should be added back to his net income for purposes of determining his support obligation under section 505(a) of the Act.” In re Marriage of Pylawka, 661 NE 2d 505 – Ill: Appellate Court, 2nd Dist. 1996

Divorce often means remarriage, so tax refunds attributable to declaring a new spouse cannot be considered as “net income” in Illinois.

“[T]he effect of [a new] wife’s income on [a party’s[ tax refunds should [be] ignored.” In re Marriage of Ackerley, 775 NE 2d 1045 – Ill: Appellate Court, 2nd Dist. 2002

If you are concerned about you and your ex’s tax refund, you probably have a lot of other financial issues to resolve as well. Contact my Chicago, Illinois family law firm to learn more about how taxes and assets are handled in an Illinois divorce.