Tag: divorce and taxes

Biden’s Tax Plan and Divorce

President Joe Biden’s latest tax proposal may require any couple thinking about filing for divorce to do some planning. Biden wants higher taxes on the wealthiest 1% to help fund education, paid leave, childcare and other social programs, and there are other other changes which may impact your divorce.

Divorce taxes

Taxes and Doughnuts

In 2017, President Trump signed the the Tax Cut and Jobs Act (TCJA) into law. The TCJA generally reduced tax rates overall, and reduced the highest individual income tax rate from 39.6% to 37%. Almost all of the individual tax cuts expire at the end of 2025 unless Congress extends them.

However, there is a new president, a new Congress, and there is little doubt president Biden’s proposal will increase your taxes and impact your divorce. For instance, the Biden Plan would revert the top individual income tax rate for taxable incomes above $400,000 to 39.6%.

Even still, the proposal could still affect people earning under $400,000 too. There’s also social security taxes. Right now, a Social Security tax is imposed on wages up to $142,800. Wages above the $142,800 ‘wage cap’ are not subject to Social Security tax.

But Biden is proposing a shrinking doughnut hole for Social Security. Earnings between $142,800 and $400,000 wouldn’t be taxed, but that doughnut hole would shrink each year as the $142,800 wage cap increases.

The Biden Plan also taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million instead of at the current top capital gain rate of 20%.

Itemized deductions are also impacted under the Biden Plan. His plan caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, and restores the Pease limitation on itemized deductions. The Pease limitation capped how much you could deduct.  The Pease limitation was repealed under TCJA.

Divorce and Tax

I’ve written about divorce and tax changes before. The impact president Trump’s TCJA changes took on divorce was huge. Most notably, Trump’s tax changes eliminated the alimony deduction. People become less willing to pay as much in alimony because of the loss of the deduction.

That change, it was claimed, disproportionately hurt women who tend to earn less and are more likely to be on the receiving end of alimony payments.

On the other hand, the alimony deduction itself has also been criticized. For example, the government argues the deduction is a burden on the IRS because, if the alimony amounts ex-spouses report paying and receiving don’t match, it can force the agency to audit two people who may already be feuding.

Divorce Taxes and Child Credits

The Biden Plan also includes two significant proposals concerning tax credits related to children. These proposals, if passed, could cause couples to spend more time arguing over who will claim the children to maximize tax benefits.

Under the TCJA, the dependency exemption was eliminated altogether, and was replaced by an expanded Child Tax Credit. If you have kids under the age of 17, you likely qualify for the CTC.  The CTC provides a tax credit of up to $2,000 per child under age 17. The CTC begins to phase out for single taxpayers with an adjusted gross income over $200,000 and married taxpayers over $400,000.

The Biden Plan increases the CTC from a maximum credit of $2,000 to $3,000 for children ages 6 to 17, and $3,600 for children under age The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.

In the corporate world, the TCJA reduced corporate tax rates from a maximum rate of 35% to a flat 21% tax rate on taxable income. The Biden Plan would increase the corporate income tax rate from 21% to 28%.

At this point, no one knows what part of President Biden’s tax proposals will become law, or what the final law would look like. But any couples considering divorce should keep an eye on these proposals and how they could impact your after-tax income and assets after separation.

The CNBC article is here.

 

The 2018 Divorce Rush?

Experts predict a surge in divorce cases this year. Why is this year different from all other years? Because in all other years, alimony is deductible to the spouse paying alimony, and next year that deduction will be eliminated.

What’s Happening to Alimony?

Currently, there is a tax deduction for people paying alimony. The tax deduction can substantially reduce the cost of alimony payments. So, for people in some tax brackets, every dollar you pay in alimony to your former spouse really could only cost you a little more than 60 cents.

The alimony deduction has been in the tax code since 1942. But, because of the new tax law, people paying alimony may not be able to deduct their alimony payments, and anyone receiving alimony will no longer report it as income.

According to the ABA, lawyers are advising you divorce now, before the 76-year-old deduction for alimony payments is wiped out in 2019 under the Tax Cuts and Jobs Act.

If you’re going to get a divorce, get it now. Potential divorcees have all of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses.

Divorce and Taxes

The new tax code changes will impact your divorce, but it isn’t the only tax which causes people to make the decision to divorce. I’ve written about the area of divorce and taxes before.

For example, the 2012 American Taxpayer Relief Act raised taxes on couples making more than $450,000, and individuals making more than $400,000. As it turns out, some couples found out they could save over $25,000 a year if they divorced.

The New Tax Law

Many divorce lawyers criticize the new law to end the alimony deduction, saying it will make divorces worse.

People won’t be willing to pay as much in alimony, which will disproportionately hurt women who tend to earn less and are more likely to be on the receiving end of alimony payments.

Conversely, the alimony deduction has also been criticized. For example, the government argues the deduction is a burden on the IRS because, if the alimony amounts ex-spouses report paying and receiving don’t match, it can force the agency to audit two people who may already be feuding.

Why it Matters

Spouses negotiating alimony payments may try to pay less when the change takes effect because there will be no tax savings.

In many cases, women are more likely to be hurt by the change as they negotiate divorce terms. U.S. Census Bureau statistics showing that 98 percent of the 243,000 people who received alimony payments last year were women.

The deduction is a big deal to couples negotiating their divorce because if someone who earns, say, $250,000 agrees to pay $4,000 per month in alimony, it really costs the person about $3,000 after taking the deduction into account.

Without the break, many people will agree to pay only what would have been their after-tax amount. It is feared that more couples will end up fighting in court because they won’t be able to agree on alimony.

2019 Deadline

The alimony deduction repeal doesn’t take effect immediately and won’t kick in until 2019. That is why lawyers are advising clients to file for divorce now.

However, meeting the 2019 deadline won’t be easy.

Some states have mandatory “cooling-off” periods, others states have residency requirements. So, you can’t just file for a divorce today, and expect that you’re going to be divorced tomorrow.

The ABA article is here.

 

What if a Spouse Dies During the Divorce?

Well this is a gloomy post: it’s about death and divorce. In November 1789, Benjamin Franklin wrote: “In this world, nothing can be said to be certain except death and taxes.” If roughly half of marriages end in divorce, there are some odds that a spouse will die during the divorce case. What happens legally and emotionally when a spouse dies during the divorce?

Emotional Roller Coaster

As the Washington Post reports, a couple of years after a wife and husband separated — but before he reached a divorce settlement — he died of a heart attack at age 57.

Overnight, the wife went from almost-ex-wife to widow. But, nearly six years later, I still feel as if I was widowed on a technicality. A real widow doesn’t have a divorce lawyer and a Match profile. A real widow is pining for her spouse, inconsolable.

Sometimes she calls herself a “partial widow.” To make her point, she mentioned a friend whose fiancé died three weeks before their wedding. “She doesn’t get to call herself a widow and I do?” “That’s ridiculous.”

Misplaced Emotions

“It’s called disenfranchised grief,” and it is also referred to as the grief that has no voice, because it’s a grief that our society typically does not recognize.”

It occurs in situations that fall outside the norm and might also include, for example, mourning the death of a former spouse or an extramarital lover. A widow who was about to be divorced has no defined place in society, so we often don’t know what we’re supposed to do.

Even responding to condolences can be awkward because there’s an element of not wanting to accept sympathy for something that is a misconception on their part. Others feel for the surviving spouse in a way that doesn’t feel accurate to the experience. It’s a different kind of pain than they’re assuming.

Legal Implications

I’ve written about divorce problems before. When a spouse dies during a divorce, the death of the spouse can have major legal implications that extend far beyond the mixed feelings you may have about losing your soon-to-be ex spouse.

Divorces are unlike other civil cases. It is true that in ordinary civil cases, the death of a party does not deprive a court of the power to enter a judgment after the death of a party. This means a court can still rule. This happens frequently in breach of contract actions, and especially in personal injury cases.

However, the general principle does not apply to divorce actions since the death itself has already terminated the marriage.

In Florida, the general rule for divorce is that there can be no judgment of divorce rendered after the death of either of the parties, since that event of itself terminates the status of marriage.

This immediate stopping of the divorce when a spouse dies during the divorce process can cause a lot of problems. This is especially true in divorce cases in which the parties are elderly, or sick, and death is a very real possibility. In those cases, the parties should seriously consider ways to avoid the court losing jurisdiction because of death.

The Washington Post article is here.

 

Divorce & April 18th Tax Day

That is not a typo. Tax Day in the U.S. this year is on April 18th. And, if you divorce as of 11:59 p.m. on December 31st, you can file as single for the entire year.

Filing “single” might be better for you, and after a divorce, every cent counts. Some people may be better off filing “married jointly”, but sharing any tax savings, and sharing information with your soon-to-be Ex, may make filing “single” your choice.

Tax Penalties

I’ve written about divorce and taxes before. For example, the 2012 American Taxpayer Relief Act made permanent the Bush-era expanded standard deduction, and the expanded 15% bracket for joint filers.

But for high income earners, the 2012 law raised taxes on couples making more than $450,000, and individuals making more than $400,000. As it turns out, some couples found out they could save over $25,000 a year if they divorced.

If you could save over $25,000 a year in taxes, you could take a trip to Italy, ski Deer Valley, put a little cash away for college, and still have some mad money to spend just by divorcing and turning their marriage into a long term relationship.

There are also a lot of risks though, known and unknown. Consider how a divorce will impact your relationship. There is no fake divorce. Once the court signs the final judgment, you are divorced. IRS rules regarding your filing status have something to say.

In addition to knowing that the filing deadline to submit 2016 tax returns is Tuesday, April 18, 2017 – rather than the traditional April 15 date – Forbes Magazine has some additional tax year tips if you have divorced, or are in the process of divorcing.

Filing Status

Be sure to select the right federal tax filing status. As noted above, it’s based on whether you were married or single on the last day of the year.

If your divorce was finalized by year-end, file your taxes as a single person or, if you had a child and qualify, head of household status; head of household offers more tax advantages than filing as a single person. Otherwise, choose “married filing jointly.”

Exemptions

Claim an exemption for your child if you’re allowed. You may be eligible to lower your taxes by taking the dependent exemption for your son or daughter if you were divorced or legally separated last year. To do so, you must have been named the custodial parent in your divorce decree

Child Support

Don’t run afoul of the tax rules for child support. Neither you nor your ex can deduct child support payments you made. But child support you received isn’t taxed as income, either.

Alimony

Avoid getting tripped up by the tax rules for alimony. If your ex-spouse paid alimony – or gave you money each month to maintain your home and life – you may owe taxes on that income. Your former spouse can deduct the payments. The rules are reversed, of course, if you were the one paying alimony.

The Forbes article is here.

 

Divorce to Save Taxes?

If you were divorced as of 11:59 p.m. on December 31st, you can file as single for the entire year. High-income married couples can get hit with the “marriage penalty” because their combined incomes put them in a higher tax bracket.

As Marketplace reports, filing “single” could be better for you, and every cent counts. Some can be better off filing “married jointly”, but sharing any tax savings sharing information with your soon-to-be Ex, may make filing “single” your choice.

I’ve written about divorce and taxes before. The 2012 American Taxpayer Relief Act made permanent the Bush-era expanded standard deduction, and the expanded 15% bracket for joint filers.

But for high-income earners, the 2012 law raised taxes on couples making more than $450,000, and individuals making more than $400,000. As it turns out, some couples found out they could save over $25,000 a year if they divorced.

Think about that for a second. If you could save over $25,000 a year in taxes, you could take a trip to Italy, ski Deer Valley, put a little cash away for college, and still have some mad money to spend just by divorcing and turning their marriage into a long-term relationship.

As Marketwatch further reports, speedy divorce seekers beware: judges can deny you an expedited divorce if you are looking for a quick split – even if that would mean over $25,000 in tax breaks.

There are also a lot of risks though, known and unknown. Consider how a divorce will impact your relationship. There is no fake divorce. Once the court signs the final judgment, you are divorced. IRS rules regarding your filing status have something to say.

In addition, there are estate planning issues, retirement and social security complications, and many other issues besides the mere tax savings.

The Market Watch article is here.