Divorce Getting Trickier With the New Tax Law: Part 1

It’s no surprise that many tax considerations end up affecting the time at which you decide to divorce. It’s like throwing a giant wrench into the workings of the entire tax system, because at first you’re viewed as a joint filing with your spouse, and then all of a sudden you’re now legally separated from that tax standpoint, leaving questions thrown up in the air without no safety net answers to break the falls. Believe it when I

say that it’s gotten even more complicated with the federal tax law that was passed back in 2012.

It’s called the American Taxpayer Relief Act, a new law raising taxes on income and investments for the wealthy. Imagine what this could potentially do to wealthy individuals contemplating divorce – you would have to heavily consider alimony in some situations, plus determine further whether or not to divide stock portfolios, pension plans, executive-pay packages and many other assets to be included. Why would alimony be such a big deal?

For starters, consider that adjusted gross income rates would skyrocket well above $400K, which is the new income bracket threshold for single filers. That’s 39.6%. When you’re considering income and how the Relief Act plays into that will determine whether or not alimony is a good or bad idea. Look at it this way: let’s say an athlete earning over $2MM annually faces a divorce petition – with alimony, that athlete would have to pay somewhere around $800K each year. Sure, the paying ex-spouse would receive a hefty tax deduction, and that may be a sweet deal. The client, the other ex-spouse, though gets the short end of the stick, receiving more taxable income.

That’s not all to consider when dealing with taxes and finances under this Act. What about Medicare, for example? You’ll find out soon enough….

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