Tag: Divorce Taxes

Biden’s Tax Plan and Divorce

Posted by Ron Kauffman on

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  The Pease limitation was repealed under TCJA.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.

 

Divorce Financial Mistakes

Posted by Ron Kauffman on

Avoid making costly divorce financial mistakes because money matters are often at the heart of divorce disputes, for better or worse. Since divorce is on the rise during the pandemic, be aware that aside from the cost of divorce, other parts of the process can end up costing you.

Divorce Mistake

No Mistake About It

For starters, some assets appear as if they have equal values. But, once you start to factor in the tax impacts, the assets can look very different. For example:

A hundred dollars in cash is different from shares of GameStop valued (at the time) at $100. Holding onto that stock can lead to appreciation (or depreciation) and selling the stock can have a tax impact.

Basically, the profit made on any given assets — the difference between the cost basis (generally, what you paid) and the sale price — ends up getting taxed as either a long-term or short-term capital gain once sold, depending on whether the asset was held for under or over a year.

Even if two assets have the same value right now, the cost basis for them may be different, and one will have more or less taxes than the other. Subtract those taxes from the value if you’re really going to do an equitable division.

So if the asset in question is, say, a traditional 401(k) account, withdrawals will be taxed at ordinary income tax rates.

Florida Divorce Mistakes

I’ve written on divorce issues and divorce planning. In Florida, a divorce is called a “dissolution of marriage.” Florida is one of the many states that have abolished fault as a ground for dissolution of marriage.

The only requirement to dissolve a marriage is for one of the parties to prove that the marriage is “irretrievably broken.” Either spouse can file for the dissolution of marriage.

You must prove that a marriage exists, one party has been a Florida resident for six months immediately preceding the filing of the petition, and the marriage is irretrievably broken.

The reason for the irretrievable breakdown, however, may be considered under certain limited circumstances in the determination of alimony, equitable distribution of marital assets and debts, and the development of the parenting plan.

The divorce process can be very emotional and traumatic for couples as well as their kids. Spouses often do not know their legal rights and obligations. Court clerks and judges can answer some basic questions but cannot give legal advice.

Everybody Makes Mistakes

If you have a 401(k) or other retirement account and your soon-to-be-ex is entitled to a percentage of the distribution, be careful how you arrange the split. If you take the money out of you 401(k) and then give it to your soon to be ex, there will be a 20% tax withholding. Additionally, if the account holder is younger than age 59½, a 10% penalty for early withdrawal could apply.

Instead, you may need an a qualified domestic relations order, or QDRO. This is a separate order from the divorce agreement which gets approved by the court and sent to the plan administrator – who also must approve it.

Sometimes, divorcing couples sell the family home and divide the proceeds as dictated in their agreement. Other times, one of the spouses remains in the house. In this situation, depending on the specifics, there are a few things to watch for.

For starters, assuming your ex will no longer be a joint owner or responsible for any mortgage on the home, you would need to refinance the loan and qualify for it on your own. Otherwise the ex spouse would still be liable for the unsatisfied mortgage.

The CNBC article is here.

 

Marriage Penalties

Posted by Ron Kauffman on

Although Florida doesn’t have a state income tax, many people moving here from other states and seeking divorce, frequently ask whether our state has marriage penalties built into the tax code. The Tax Foundation has the answer.

marriage penalty

What is a Marriage Penalty?

A marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples.

In other words, a marriage penalty arises any time a married couple pays higher income taxes than they would have paid if they were un-married and filed individual tax returns.

At the federal level, the Tax Cuts and Jobs Act of 2017 definitely lowered the cost of being married for many couples. But being married can be more expensive than being two single tax filers on April 15th.

For example, if a couple has children and both spouses earn income, they can owe thousands of dollars every year just for being married.

Some states have their own income tax. Under a graduated-rate income tax system, a taxpayer’s marginal income is exposed to progressively higher tax rates.

A marriage penalty might exist when a state’s income brackets for married taxpayers filing jointly are less than double the bracket widths that apply to single filers.

Put differently, married couples who file jointly under this scenario face a higher effective tax rate than they would if they filed as two single individuals with the same amount of combined income.

Florida Divorce and Tax

I’ve written about divorce and taxes before. For example, in 2012 the 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.

State Marriage Penalties

While Florida doesn’t have a state income tax, fifteen states have a marriage penalty built into their bracket structure. Seven additional states (Arkansas, Delaware, Iowa, Mississippi, Missouri, Montana, and West Virginia), as well as the District of Columbia, fail to double bracket widths, but offset the marriage penalty in their bracket structure by allowing married taxpayers to file separately on the same return to avoid losing credits and exemptions.

Ten states have a graduated-rate income tax but double their brackets to avoid a marriage penalty: Alabama, Arizona, Connecticut, Hawaii, Idaho, Kansas, Louisiana, Maine, Nebraska, and Oregon.

The ability to file separately on the same return is important in states that do not double bracket widths, as is the ability to do so even if the couple files jointly for federal purposes.

While married couples have the option of filing separately—though some states only allow this if they do so on their federal forms as well—this normally creates a disadvantage, because it either disallows or reduces the value of deductions and credits available to the family jointly, which is also a form of marriage penalty.

Filing separately on the same return eliminates this problem, though at the cost of slightly greater complexity than doubling tax brackets for joint filers so that there is no penalty for filing jointly.

The Tax Foundation article is here.

 

Divorce Stimulus Checks and More Good Coronavirus News

Posted by Ron Kauffman on

If you have not already received it (and spent it shopping), your Economic Impact Payment may be on its way. But if you’re separated or going through a divorce, your economic stimulus check may not be as stimulating as you had hoped. As always, there’s also some good coronavirus news.

Divorce Stimulus Checks

A Stimulating Divorce Issue

Since the President signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), the $2 trillion stimulus package to spur the economic recovery, millions of Americans have already received their Economic Impact Payments and are busy shopping.

You may be eligible to receive a payment if you are a U.S. citizen, permanent resident or qualifying resident alien, cannot be claimed as a dependent on someone else’s tax return, have a Social Security number and an adjusted gross income below a certain amount.

Qualifying single adults who have an adjusted gross income of $75,000 or less will receive $1,200. Married couples with no children earning $150,000 or less will receive a total payment of $2,400. Taxpayers filing as head of household will receive full payment if they earned $112,500 or less.

But will the stimulus funds be impacted because you are in a divorce or family law case?

Florida Divorce and Tax

I’ve written about divorce and taxes before. For example, after the new tax code changes became law, it eliminated the alimony deduction. Many people criticized the tax law change in general. For example, the decision to end the alimony deduction received a lot of criticism. Many argued it made divorce worse.

Since the change, we’ve seen that some people are not willing to pay as much in alimony. This reduction in alimony amounts being paid has disproportionately hurt women, who have tended to earn less, and are more likely to be on the receiving end of alimony payments.

Who CARES?

For everyone who has not received it, the stimulus payment checks are something being counted on every day. Fortunately, most people should expect to receive their one-time, $1,200 stimulus payment from the IRS in the next few weeks. However, some people may receive less than they expected.

For example, if you have not filed your 2019 tax return, the IRS will calculate your payment based on the adjusted gross income listed on your 2018 tax return.

Also, if you have a pending divorce case, the payment will be deposited into the bank account that was provided to the IRS on your previous tax return. So, if your last tax return was a joint return prepared with your spouse, you may have to consult an attorney to discuss your options for recovering your payment.

Don’t forget you may also receive an additional $500 stimulus payment for each qualifying child. For anyone who filed jointly with their spouse, and whose custody arrangement has changed since they last filed a tax return, the portion of the check allocated for qualified children may be impacted.

Finally, the rules for child support enforcement are still in effect. Federal law requires child support agencies to collect past due child support from federal tax refunds.

In passing the federal CARES Act, Congress did not exempt the stimulus payment checks from federal offsets for unpaid child support arrears. All or a partial amount of your stimulus check may be intercepted and used to pay unpaid child support.

Good Coronavirus News

As we enter summer, there is good coronavirus news. More and more cities have decided on timetables for reopening certain parks and recreational facilities as part of a phase of returning to normal during the coronavirus pandemic.

  • In Miami, parks, boat ramps, golf courses and other facilities will open with certain restrictions.
  • Face coverings must always be worn unless otherwise noted.
  • Social distancing must be observed, and there can’t be gatherings of 10 or more people.
  • Sadly, swimming pools are not being opened for adult lap swimming. This critical policy misstep – to open swimming pools to adult lap swimming – is a major oversight mayors around the state seem to be making, and will need to be corrected in the future.

The IRS economic impact payments information page is here.

 

Divorce Time Flies

Posted by Ron Kauffman on

The New York Times is the latest media outlet noting that a new tax law – that took effect in January – has added a new urgency for many Americans contemplating divorce. Why would a new tax law have such an impact on divorce?

divorce time

Beat the Clock

As the New York Times article notes, several key changes in the tax law may determine whether it is better to complete or update a divorce agreement by Dec. 31st or wait until the new year.

One of the biggest changes affects alimony, which will not be a tax break for Americans after this year. The new tax law is also causing parting spouses to look more closely at benefits for their children and the values of privately owned businesses and partnerships.

In the Nick of Time

I’ve written about the area of divorce and taxes before, but the Times article notes four areas that couples considering a divorce should examine before the end of the year:

Alimony

As many people have heard, the tax law is going to turn the calendar back on alimony. 77 years in fact. That was the year the Revenue Act of 1942 first made alimony deductible for the spouse paying it and taxable for the spouse receiving it.

The new tax law could become a problem in divorces settled after December 31, 2018, because under the new law, the alimony payer will be taxed on the full amount while the recipient will pay no tax on it.

Prenuptial Agreements

It is common in prenuptial agreement to have language calculating alimony payments based on years of marriage, and a clause saying alimony payments are deductible for one spouse.

In the absence of guidance from the I.R.S., a document calling for deductible alimony might not be honored if alimony is no longer deductible.

Business Valuations

Business valuations have always been an important component of divorce. The new tax law increases the cash flow of certain pass-through entities — businesses where the taxes are picked up by the owner, not the company — in a way that raises their value.

However, a higher cash flow – because of the change in the tax law this year  – may not be known until the business owner files a tax return next year.

Other Assets

Should you ask for the house or retirement? The new tax law, particularly in states where deductions for high state and local taxes have been capped, may make the home less valuable than a retirement account with a similar value.

Spouses who get the retirement account will not be able to draw down on it until age 59½, but they will have a more solid financial base in their later years. And by opting for the retirement account over the house, they can avoid paying those property taxes.

The New York Times article is here.

 

The 2018 Divorce Rush?

Posted by Ron Kauffman on

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.

 

Divorce & April 18th Tax Day

Posted by Ron Kauffman on

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? The Marriage Penalty Tax

Posted by admin on

On behalf of Ronald H. Kauffman, P.A. posted in Divorce on Friday, May 31, 2013.

Being married comes with joys, sacrifices, tax penalties and . . . wait, tax penalties?

The marriage penalty is the situation where a married couple pays higher income taxes than they would have paid if they were un-married and filed individual tax returns. Should you divorce to avoid this penalty?

The new American Taxpayer Relief Act of 2012 sort of reduced the marriage penalty by making permanent the Bush-era expanded standard deduction and the expanded 15% bracket for joint filers.

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

Think about that for a second. If a couple could save over $25,000 a year on their taxes, they could take a Celebrity Cruise to Italy, ski Deer Valley, put a little cash away towards Penn, and still have some mad money to spend just by divorcing and turning their marriage into a long term relationship.

There are a lot of risks though, known and unknown. I would encourage anyone – before they even thought about speaking to their spouses – to think about a few things:

  • The impact on your relationship. I don’t know of a good way to ask for a divorce: “Honey, I want a divorce. No, no wait, come back, it’s to save big bucks . . . really!”
  • There is no fake divorce. Once the court signs the final judgment of divorce, you are divorced. Once you’re divorced, your Ex may find someone who thinks marriage is more valuable than 5% adjusted gross income.
  • IRS rules regarding your filing status have something to say. IRS publication 504 warns that if you obtain a divorce just to file as unmarried with the intent to remarry the next tax year, you have to file as married individuals.
  • State law. All no-fault states have minimum requirements for getting a divorce. Florida, for instance, requires at a minimum that your marriage be irretrievably broken before you can get a divorce.

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

Most people who marry do so forever, and with the sincere intention of honoring their vows. Is the money worth it?

Can Divorcing Save You Money in Taxes?

Posted by admin on

On behalf of Ronald H. Kauffman, P.A. posted in Divorce on Sunday, January 6, 2013.

There are many good reasons people have for getting divorce. But should you get divorced for the money saved on tax filing status? The Eleventh Hour agreement to avoid the fiscal cliff known as the American Taxpayer Relief Act of 2012, was signed into law this week and may have created a new marriage tax. The Act may make divorce a very profitable decision for couples seeking to reduce their tax exposure, whether they want to divorce or not.

As the online news magazine The Fiscal Times reports:

Meet the new George and Martha – two investment bankers who fell in love over a bottle of Barolo while students at Wharton. They were made for each other: they had the looks, the lifestyle, and the resumes that Wall Street firms bid for . . . Before long they were each making about $400,000 a year. And, thanks to the Bush-era tax cuts, they were able to keep a lot of that money and live the high life.

…

The new law raises taxes on couples making more than $450,000 and individuals making more than $400,000. When their accountant told them they may have to limit their deductions because of their joint incomes as well, they asked her to run the numbers and come up with an alternative. As it turns out, George and Martha would save over $27,000 a year if they divorced. And so they did. But they’re still together, in some ways closer than ever.

Think about that for a second. If a couple could save $27,000 annually on their taxes, they could take a European cruise, Colorado ski vacation, put a little cash away towards college expenses, and even have some mad money left over – every year. How, just by divorcing and staying together in a long term relationship!