Understanding the Tax Consequences of Divorce

March 27, 2013 (Press-News.org) Understanding the Tax Consequences of Divorce

Article provided by Mirick, O'Connell, DeMallie & Lougee, LLP
Visit us at http://www.mirickfamilylaw.com

Going through a divorce involves a lot more than just a lifestyle transition. In addition to adapting to a new life as a single person, most new divorcees will also face significantly different financial outlooks than they did when they were married.

This is especially true for couples where one spouse stayed home while the other worked, or where one spouse had a significantly higher income than the other. In those cases, courts may consider awarding alimony(also known as spousal support or spousal maintenance) to the spouse with the lower income. Alimony payments are intended to provide a standard of living that is similar to the one the couple enjoyed during the course of their marriage.

In addition, many divorcing couples will see their assets redistributed during the property division process. This may involve selling marital property - like a home, antiques or stocks - and dividing the proceeds between the spouses.

All of these changes come with their own tax consequences. For example, alimony payments are generally taxable as income to the spouse who receives them and deductible to the spouse who pays them (Child support, on the other hand, is generally neither taxable nor deductible). In addition, there may be tax consequences relating to the division of certain assets.

New Tax Laws for High-Income Earners

The tax consequences of divorcebecame more complicated this year with the passage of the American Taxpayer Relief Act (the "ATRA"). The ATRA was passed in January with the intent of avoiding the so-called "fiscal cliff." While the ATRA prevented many middle-income households from having their taxes raises, higher-income households will likely experience some tax increases in 2013.

For example, the ATRA raised the tax rate on single-filer incomes over $400,000 from 35 percent to 39.6 percent. Individuals whose alimony payments push them into this upper tax bracket will now have to pay higher taxes on any income over the $400,000 threshold.

The ATRA also raised capital gains taxes. Single filers will now have to pay a 3.8 percent Medicare surtax for any capital gains, dividends or investment income over $200,000. This change will be most noticeable when it comes to dividing investment portfolios and other income-producing assets.

In addition, the capital gains tax rate for single filers with annual incomes over $400,000 was raised from 15 percent to 20 percent.

Minimizing Divorce Taxation

It is important to account for these and other tax concerns when dealing with post-divorce financial arrangements. In many cases, an experienced divorce attorney will be able to work with you and your accountant to structure your alimony and property division agreements in a way that minimizes any negative tax implications.