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Divorce may bring tax benefits

Some changes to the federal income tax law may actually benefit couples in Texas and elsewhere who have put off getting a divorce until this year.

The first tax change is a result of President Obama's health care plan. To help pay for the plan, two new taxes have been enacted: an additional 0.9% Medicare tax on wages and income from self-employment, and an additional 3.8% tax on net income from investments. Both taxes kick in when the taxpayer's income exceeds certain thresholds. But the thresholds do not double for married couples. While the threshold for single taxpayers is $200,000, the threshold for the combined income of married taxpayers is not $400,000, but only $250,000.

A similar situation is created by a new tax law which resulted from the negotiations to end the so-called "fiscal cliff" crisis. The top tax rates for high earners have increased from 35% to 39.6% on ordinary income, and from 15% to 20% on long term capital gains and certain dividends, to the extent such income is above certain thresholds. As with the health care tax, however, the thresholds do not affect single and married taxpayers equally. The threshold for a single taxpayer is $400,000, while the combined threshold for a married couple is not double that, but only $450,000.

Finally, a number of deductions and personal exemptions are being phased out as part of the fiscal cliff deal, and once again the thresholds at which these changes kick in are not the same for single and married taxpayers. The threshold for singles in this case is $250,000 in adjusted gross income, but a combined $300,000 for a married couple.

Unfortunately for high-earning married couples, the new laws cannot be avoided by each spouse filing a separate tax return singly. Married taxpayers who file singly do not get to take advantage of the single thresholds; instead they are subject to thresholds which are exactly half those of the applicable married thresholds.

No one is suggesting, of course, that a couple should consider divorce as a way to save on taxes, and it is hard to imagine any couple doing so. Divorce, like marriage, should only be entered into in good faith. But a high-income couple contemplating dissolution of marriage might be relieved to know they may actually get some tax benefit out of divorcing in the coming year.

Source: Forbes, "Want To Save On Taxes? Get A Divorce," Tony Nitti, Jan. 22, 2013

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