Divorce Can Impact Taxes In Surprising Ways

Divorce Can Impact Taxes In Surprising Ways
Divorce

Common reasons for a couple to divorce can include a lack of commitment, infidelity, unrealistic expectations or financial disagreements, but lately, a new reason is emerging. Some couples are now divorcing to save money.

The American Taxpayer Relief Act, signed into law on January 2 of 2013, increases taxes for some Americans. One example was outlined recently in The Fiscal Times.

The article shared the story of one couple who decided to divorce simply because they could save money on their taxes. The couple is still together, sharing a large apartment in the heart of one of New York’s finest neighborhoods. However, because of their new “single” filing status, the couple saves almost $30,000 a year.

Divorce and taxes

Regardless of your tax bracket, a divorce will likely impact your taxes. This year, the American Taxpayer Relief Act has produced some changes that should be

considered when putting together a divorce settlement.

Divorce Can Impact Taxes In Surprising Ways
Divorce Can Impact Taxes

The biggest change that directly impacts those divorcing this year is the adjustment to tax rates. As of January 2013, those making more than $400,000 singly or $450,000 jointly are taxed at a rate of 39.6 percent. Prior to the passage of this act, taxpayers in this group were taxed at 35 percent. This 4.6 percent increase can translate to over $18,000 singly and over $20,000 jointly in additional taxes.

In addition to income, the percentage charged to a taxpayer’s capital gains and dividends also increased. Prior to the act, these funds were taxed at 15 percent. The new law increases this rate to 20 percent.

These changes motivated the couple illustrated above to take a closer look at their finances. Jointly, the couple earned well over the $450,000 limit, but separately each one fell under the $400,000 mark. As a result, the couple chose to divorce so they could file their taxes under the single status and save thousands of dollars on their taxes.

Another issue that requires consideration with this specific portion of the new law is alimony. Those who make alimony payments can take a tax deduction, while those who receive alimony generally include the payment in their income calculations. As a result, those filing for divorce should check to see if alimony payments would set them over the $400,000 limit.

It is important to take these and other tax law changes into consideration when structuring a divorce settlement. In some cases, being aware of the changes and planning appropriately can translate to thousands in tax savings.

If you are considering a divorce, contact an experienced divorce attorney to discuss your unique situation and how these tax changes may impact your settlement.

 


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