Salem residents who follow the news are likely very familiar with the "fiscal cliff" that dominated headlines at the end of 2012. To avert this fiscal cliff, Congress passed a series of tax reforms entitled the American Taxpayer Relief Act. The ATRA went into effect on January 1, 2013, and is already affecting property division during divorce.
The ATRA raised taxes on many high earners. For example, a single person would be taxed at 39.6 percent for income above $400,000. The tax liability of people falling into this higher tax bracket could be affected by spousal support and property division during divorce.
Spousal support is deductible by the person who pays it and reportable as income by the one who receives it. This means that spousal support could bump the person receiving it into the higher tax bracket.
The ATRA will also change tax rates on the division of investments and real property. For those taxpayers in the 39.6 percent bracket, the new law increases capital gains tax from 15 percent to 20 percent. This can take a significant chunk out the value of the asset that is exchanged. To avoid large capital gains tax liabilities, some divorcing couples are forgoing stock and real estate and instead requesting cash and retirement funds.
While a divorce ends an emotional partnership, it also ends a financial partnership. As money exchanges hands, the couple creates tax liabilities. For certain divorcing couples, the ATRA will impose even greater tax burdens. But these liabilities can be mitigated through careful financial planning.
Source: Forbes, "Divorcing Women: Will The New Tax Laws Impact Your Divorce Settlement?," Jeff Landers, Feb. 20, 2013