Tag: Marriage Taxes

Marriage Penalties

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

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

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?

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.

 

Religious Marriage & Divorce

A recent survey found that 6 in 10 women who had Muslim religious weddings are not in legal marriages, depriving them of spousal rights. Many people have religious weddings, and don’t get a marriage license. What is the importance of the marriage license, and is the religious ceremony enough?

According to the London Guardian, nearly all married Muslim women have had a nikah, a religious marriage ceremony.

However, about 61% had not gone through a separate civil ceremony which would make the marriage legal.

If you have a religious marriage only, and the marriage breaks down, you may be unable to go to family court to divide marital assets, such as the family home and your spouse’s pension.

This trend of having a religious ceremony, but no civil marriage license, is becoming a problem as more people think having religious marriage ceremony is enough.

Florida Marriage Law

I’ve written about marriage validity, and the intersection between religious marriage and civil marriage before. First off, in order to be validly married in Florida, you need a license from the government.

No, you don’t get your marriage license from the DMV, but from the Clerk of the Court.

Getting a marriage license may seem like a trivial obligation, but if you want your religious marriage recognized in court, you must get a marriage license.

There is a fee for getting a marriage license, and that fee is reduced for attending pre-marital counseling. The license is valid for 60 days. The officiant at the ceremony must certify that the marriage was solemnized.

The certified marriage license must be returned to the clerk or an issuing judge within 10 days, and the clerk or judge is required to keep a correct record of certified marriage licenses.

Florida courts have repeatedly warned people that they cannot depart from the requirement of the Florida Statutes to have a license, otherwise the courts would be creating common-law marriages, which are not recognized here.

If you only have the religious marriage, but do not file for a marriage license, your marriage will not likely be recognized, and you cannot divorce, and cannot make claims for equitable distribution, or ask a court for alimony.

That can be a devastating surprise for many people.

Religious Only Marriages

Every religion has there own method of marrying. For Catholics, the celebration normally takes place within a Mass. In Judaism, there’s a marriage contract, a marriage canopy, and the breaking of a glass. In the Islamic nikah, there is a reading from the Qur’an, and the exchange of vows in front of witnesses.

Religious marriage without a license, is not only a major problem, but a growing problem.

Religious marriages are also easier to terminate than legally registered marriages, so marriage has become easy and divorce has become easy. It’s a disturbing trend.

Generally in Florida, regularly ordained ministers of the gospel or elders in communion with some church, or other ordained clergy, and all judicial officers, clerks of the circuit courts, and notaries public may solemnize the rights of matrimonial contract, under the law.

The Guardian 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.

 

Sex, Marriage and Taxes in court

On behalf of Ronald H. Kauffman, P.A. posted in Marriage on Thursday, May 23, 2013.

Alright, this post is not as exciting as the title suggests. But, in March our highest court did hear arguments in the Defense of Marriage Act (DOMA) case, and that case has an interesting twist which could impact other divorce cases.

Edith Windsor and Thea Spyer were a lesbian couple in New York, and married in Toronto, Canada where it was legal. Two years later, Spyer died. While New York recognizes same-sex marriages, under DOMA the federal government can’t.

As a result, Windsor had to pay more than $363,000 in estate taxes. Had their marriage been treated the same as an opposite-sex marriage, she would not have had to pay any taxes. Windsor sued the government to get her money back.

A trial judge held part of DOMA violated the equal protection clause of the Fifth Amendment, and that Windsor should be repaid her taxes with interest. The court of appeals upheld the trial judge, and the government petitioned the Supreme Court to grant certiorari.

Then the train went off the tracks. President Obama ordered the Justice Department to stop defending DOMA in federal court. In response, Republicans in the House of Representatives ordered their own Bipartisan Legal Advisory Group (known as BLAG) to defend the statute.

BLAG’s ability to argue the case is a problem. If the parties agree the statute is unconstitutional, how can someone come in and take over the case. Is that really a “case or controversy” giving jurisdiction? This can happen in other family law cases when grandparents, guardians ad litem, attorneys ad litem and government agencies get involved.

So, the three big issues before the U.S. Supreme Court are whether:

(1) DOMA violates the 5th Amendment’s guarantee of equal protection as applied to a legally married same-sex person;

(2) Obama’s agreement that DOMA is unconstitutional deprives the U.S. Supreme Court of jurisdiction to decide this case; and

(3) BLAG can continue with the case after the Justice Department drops it.

You can follow the case here.