Bohm Wildish – Divorce and Taxes: Congress passed the American Taxpayer Relief Act (ATRA) at the beginning of this year to prohibit tax increases to the middle class and spending cuts in motion if no action were taken, and to avoid the “fiscal cliff.” But if you were in the middle of a divorce settlement, the new tax laws may impact your outcome.
Forbes recently reported that two areas should be looked into: changes to income and division of assets.
Changes to income: Alimony (also called spousal support or maintenance) is paid from the spouse with the job/income to the spouse without for a specified set amount of time, decided in the divorce agrement. Alimony, in most cases, is taxable income. The ATRA raised taxes on high incomes, such as alimony. If you’re a single filer with an income larger than $400K, you’ll now pay the 39.6% tax rate.
There are ways around paying this high rate on alimony. You can receive a lump sum payment upfront instead of monthly payments. That one-time payment is not taxable. So while your ex may pay slightly less, you’ll be able to keep more of the money. You could also reconsider your child support vs. spousal support negotiation. Child support is not a deductible expense for your husband, nor taxable income for you. Alimony is usually a deductible expense and taxable income.
Changes to division of assets: ATRA now sets a 3.8% Medicare surtax on capital gains, dividends and other investment income above $200,000 for a single filer. Filers in the 39.6% bracket will pay almost 24%, not including state’s capital gains taxes. This can put a huge dent in the amount you hope to sell an asset for. Instead, you could consider receiving cash or retirement funds, which don’t have capital gains tax exposure and, except for Roth accounts, will be taxed only when you withdraw money.
Speak to an experienced attorney or divorce financial professional before agreeing to a settlement.
Read More: Seven Common Tax Questions During and After Divorce