New tax law has implications for divorce settlements

On behalf of Lake Toback Attorneys

For Illinois taxpayers who are also embroiled in a divorce, the American Taxpayer Relief Act that was enacted on the first day of the year in response to the “fiscal cliff” negotiations that closed the previous year may be considered a far from pressing matter in the face of legal quarrels over asset division and child support. The new law, however, has implications that may apply to thousands of individuals in the state who are going through a divorce, particularly in regard to the areas of asset division and income changes.

Due to one of the Act’s major features that aimed to increase tax rates for high-income individuals, one’s alimony may nudge him or her into a different, more highly taxed, income bracket. This is due to the fact that alimony must be declared as taxable income once tax season rolls around. Because of this potential tax-time complication, individuals who are offered alimony as part of a divorce settlement are encouraged to evaluate how their tax situations will unfold if they accept an alimony package. Alternatively, they could accept the alimony in the form of a single payment in a fixed amount, known as an upfront lump sum payment. Adjustments to alimony amounts and even child support amounts may also be made to balance one’s income requirements and avoid a tax-season surprise.

Asset division has also been subtly affected by the new law, which established a 3.8 percent surtax on capital gains and investment income exceeding $200,000 per filer. For high-income filers who fall in a more heavily taxed bracket, capital gains will be taxed at 20 percent, up from the erstwhile 15 percent. For this reason, individuals are advised to opt for retirement funds or cash instead of real estate or stocks as a form of income to be gained from a divorce settlement.

An experienced family law attorney can help individuals understand the more nuanced implications of the new tax law as well as advise on matters of asset division and valuation in order to potentially expedite the divorce process.

Source: Forbes, “Divorcing Women: Will The New Tax Laws Impact Your Divorce Settlement?,” Jeff Landers, Feb. 20, 2013

Excerpt from:
New tax law has implications for divorce settlements