Divorce, Taxes and the Fiscal Cliff

By Tanya Roth, Esq. on February 26, 2013 | Last updated on March 21, 2019

The fiscal cliff loomed ahead and then vanished into thin air with the passage of the American Taxpayer Relief Act on January 1, 2013.

While the ATRA seemed to wipe away many potential tax woes, the Act had some implications for those with impending divorces.

So as one Forbes writer put it, some of the provisions of the Act could put those people in the midst of a divorce over a fiscal cliff of their own.

These new tax laws could have significant impact on one's settlement agreement pending a divorce. If you're going through a divorce, it makes sense to find out more about these changes.

Let's take alimony, for starters. Alimony is income paid incident to a divorce and pursuant to a separation agreement in a divorce. This income is paid in intervals and is a payment from one spouse to another. The key here is that for tax purposes, alimony payments are those laid out in the divorce or separation agreement.

These payments count as income to the recipient in most cases. That means that they are taxable. Under the ATRA, the recipient will have to pay a 39.6 percent tax on any income above and beyond $400,000.

Child support, however, is not taxable income.

Similarly, the rise in capital gains tax will affect the division of assets. Those single filers with income over $400,000 will now have to pay 20 percent in capital gains.

Divorce isn't only about living arrangements. There's a lot of money at stake in a divorce; as a result, there's a lot of tax planning to do.

For some, it's easy to draw the line and divide assets. For others, particularly those with higher net-worth, it's more difficult to draw that line.

It's almost imperative that higher net-worth individuals look for financial help. Some divorce attorneys are well versed in tax laws related to divorce. Otherwise, a tax lawyer and a divorce lawyer go hand-in-hand for high dollar divorces.

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