New Tax Changes Can Impact Divorce Agreements
By now, all year-end tax records have been received and people are busy preparing tax returns for filing by April 15. Earlier this year, changes were made to the tax code which could affect many people, especially those in the process of divorce.
On January 1 the American Taxpayer Relief Act (ATRA) was passed as a remedy to the “fiscal cliff” this county was facing, replacing the alternative solution, which included tax increases for middle-class Americans and widespread spending cuts. The ATRA, however, contains some provisions that could negatively impact those in the process of divorce. Two areas of most concern, according to a recent article on Forbes.com, are income changes and distribution of assets. (1)
When negotiating alimony payments, be aware that the ATRA increased the tax rate for those in the higher income brackets to 39.6% from 35%. The threshold for that bracket is taxable income in excess of $400,000 for a single filer. Alimony is considered taxable income so it is advisable to consider how any alimony award would affect your current tax situation before reaching agreement on these payments. In some cases, a lump sum settlement, which would be non-taxable for both parties, could be preferable to scheduled alimony payments. (1)