On January 1 of this year, the U.S. Congress passed the American Taxpayer Relief Act (ATRA) forestalling federal tax increases for the middle class and various spending cuts. Although the country did not topple over the “fiscal cliff” that everyone was so concerned about, passage of the ATRA brought about more cringes than sighs of relief for many divorcing couples in Colorado and around the nation.
Couples on the verge of divorce will want to consider tax ramifications of a split as the ATRA may have a significant impact on the timing of their divorce, division of their assets and negotiation of their settlement.
Alimony payments – spousal maintenance or support paid by the higher wage-earning spouse to the other – are taxable as income to the recipient. The ATRA raised the tax rate for those whose income exceeds $400,000 per year.
Thus, if alimony payments push the recipient spouse over that threshold, he or she will have to pay nearly 40 percent in taxes on any amount of income over $400,000. Additionally, the spouse paying the alimony receives a nice tax deduction for the amounts paid.
For those nearing the single-payer tax threshold, he or she may wish to negotiate less alimony in exchange for non-taxable benefits, such as upkeep of a retained property or increased child support.
Division of assets during the process of a divorce is also greatly affected by the ATRA. For single filers who have income over $200,000, there is now a 3.8 percent Medicare surtax on dividends, capital gains and other types of investment income. Furthermore, those with income over $400,000 are taxed an additional 5 percent on capital gains at the federal level. Thus, your capital gains may be taxed at an almost 24 percent level, which does not include your state’s capital gains taxes.
If you are negotiating a division of income-producing investments, such as Real Estate Investment Trusts or stock portfolios, seek the advice of a legal professional who handles high-asset divorces. The tax burden of each asset may have a drastic impact on what you actually take away from your divorce.
Seek professional help
These are only a few of the changes made by passage of the ATRA. If you are contemplating divorce, seek the counsel of a legal professional experienced in high-stakes divorces. A Denver divorce lawyer who is knowledgeable about equitable property division, business valuation, long-term ramifications of divorce and other family law issues can help guide you through the legal maze of the divorce process.