Divorce Getting Trickier With the New Tax Law: Part 2

What’s one common denominator with divorce agreements among the wealthy? Investment portfolios. This is the heart of asset distribution when you think about it, so you can only imagine what the American Taxpayer Relief Act has potentially done in the configuring and organization of those portfolios to ensure everyone gets an equal piece of the pie.

Thanks to the new 3.8% Medicare surtax on all capital gains, dividends and other investment revenue consisting of well over $200K adjusted gross income, you may be looking at more “horse trades” over many portfolios. Why? The problem with maintaining portfolios generating more taxes is the loss in return. Nowadays because of the higher Medicare tax, divorcing spouses are looking for another tactic – seeking other assets, such as rental properties, to generate tax losses. This imbalances it all out. Instead of going for that 50-50 split, the share of the portfolio might go 60-40 or 70-30. Why is that? Consider a divorcing spouse noticing that there will be more tax paid on a specific portion of that portfolio related to the new Medicare surtax. If that’s the case, the spouse may want more of an allocation to offset that increase in tax.

Naturally, this could open up a whole new Pandora’s box, unless the other party’s amicable enough to come to an agreement with the imbalanced share of the portfolio. Either way you look at it, it compels more deliberation, discussion and maybe even dispute on how to split the assets. Some assets might have more value than others – but when it comes to taxes, in the long run, the unlikely spouse with the less ‘valuable’ property might benefit better from their tax returns.

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