How Will New Tax Laws Impact My Divorce Settlement?

In a recent article in Forbes, Personal Finance Contributor Jeff Landers examines the possible impact of the new tax laws on divorcing women. The American Taxpayer Relief Act, passed January 1, 2013 in order to prevent the economy from falling of the dreaded “fiscal cliff,” could possibly affect the negotiations for a divorce settlement. Landers emphasized the need to be informed about how the new laws could impact your particular settlement agreement and negotiation; such knowledge could affect the outcome.

One of those most significant provisions of the American Taxpayer Relief Act has to do with the raising of tax rates on taxpayers with high incomes. According to the Act, if the taxpayer is a single filer with an annual income greater than $400,000, he or she will be required to pay a rate of 36.9%–a 4.6% increase from years past—on the income that exceeds the $400,000 mark.

How Will This Impact My Divorce Settlement?

As Landers notes, divorce will most assuredly change the economic situation of the parties involved. There is a potential for alimony (also known as “spousal support”) that would be paid from the “moneyed” spouse to the “non-moneyed” spouse. The alimony payments would then mostly likely be classified as taxable income.

Landers often encourages his clients to consider an upfront lump sum payment instead of alimony payments, as the lump sum would not be categorized as taxable income for the spouse who receives it, nor would it be deductible to the spouse who is paying it.

Landers notes that looking at the long term financial effects while engaged in a divorce settlement is important, as oftentimes the non-moneyed spouse has given up valuable education opportunities or professional progress in order to support the moneyed spouse. Landers explains that the purpose of alimony is to ensure that the non-moneyed spouse maintains a similar standard of living.

The point that Landers emphasizes when dealing with divorce settlements is to be well-informed about the tax implications of the agreements. If you have any questions, contact your knowledgeable tax attorney.

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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