Tax time is almost here again, and while many people look forward to a refund, some Illinois couples going through a divorce may find themselves surprised with a tax bill. The fiscal cliff legislation that passed in January of this year was a way to help prevent middle class tax increases, but some of the bill’s new provisions could force some people into new tax brackets, forcing them to pay additional taxes. If a divorce has resulted in alimony payments or a large settlement, and that amount increases a single filer’s income past $400,000, there is a good possibility they will be required to pay the newer tax rate, an increase of over 4 percent from last year.
Before a divorce settlement is finalized, it may be a good idea to ensure it makes good financial sense and doesn’t result in trouble at the end of the tax year. Some may consider asking for a lump sum payment as a way to avoid monthly alimony payments. The lump sum payments are not taxable to the person who received it and cannot be deducted by the person who paid it. However, the spouse who pays will most likely try to negotiate the amount of a lump sum payment in order to take the tax consequences into account.
Asset division can also be affected by the new tax guidelines. When in the process of negotiating the division of a spouse’s stock portfolio, be careful that it does not result in significantly increased tax rates. Some may decide the best route would be to negotiate with the spouse for a different asset, such as other retirement funds.
However an Illinois couple decides to divide their assets, tax time may be a good thing to keep in mind as negotiations progress. This could mean requesting knowledgeable legal assistance, especially for someone unfamiliar with the potential pitfalls sometimes associated with a divorce settlement. Doing so could result in an equitable settlement, but also reduce the likelihood of an unpleasant surprise come tax season.
Source: Forbes, “Divorcing Women: Will The New Tax Laws Impact Your Divorce Settlement?” Jeff Landers, Feb. 20, 2013