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)
Negotiating the distribution of marital assets is another area needing special attention, especially when dividing investments assets that produce income. ATRA has established a 3.8% Medicare surtax on investment income, such as dividends and capital gains, exceeding $200,000, and increased the capital gains tax rate for those in the new 39.6% tax bracket to 20% from 15%. These numbers do not include state capital gains taxes. (1)
Failure to consider tax implications of divorce can be costly at any tax bracket. Some issues to consider include who claims head of household; deductibility of child support and maintenance payments; and, which fees, if any, associated with the divorce, including attorney fees, are deductible.(2) Another tax issue to consider is which spouse can claim the children as dependents on their tax return. According to the Internal Revenue Service, the parent who has custody for more than six months each year claims the dependents. However, a provision can be made for both parents to alternate this exemption every other year, as long as both parents agree or the court orders such a provision. (3)
Divorce and taxes are both complicated matters in their own right. Together, they can be problematic and may require the advice of a financial professional as well as a lawyer. If you or someone you know needs assistance with a divorce, especially in Hunterdon County, contact the experienced family law attorneys at The Rotolo Law Firm.