Posted on February 9, 2008 by John Steele
No this is not a post about the two certainties in life, but rather how one affects the other.
I will not pretend to even scratch the surface of tax law in a blog post, just a couple of helpful tips:
If you are married at 12:00 midnight on December 31st of Year X, you can file a joint return. If you get divorced on Dec 30th, you CANNOT.
Alimony (its now called Maintenance for P.C. reasons) is not taxable to the person giving it, it is taxable to the receiver. The opposite is true for child support. This is very important (see the next point)
Oftentimes, the two spouses are in different tax brackets. So $1000 in gross income might equate to $650 in after tax income to one spouse and $800 to another. If spouse 1 in the higher tax bracket can shift the tax burden to spouse 2, spouse 1 can give more money and still pay the same in taxes:
Scenario #1
Spouse 1 pays $1000 in monthly child support, no reduction in taxable income or tax bill. His tax bill on the money he does not see is $4200. Ouch.
Scenario #2
Spouse #1 pays $1200 in monthly alimony, reduces his taxable income by $14,400, reducing his tax bill by $5040. Reduce that savings by the extra $2400 he pays for the year ($200 a month more), and he still saves $2650. Spouse 2 has to pay tax on alimony, but since their tax bracket is normally MUCH lower, spouse 2 either pays none, or minimal tax. Even if Spouse 2 is in the 20% bracket, they only pay $2,880. The difference between $5040 and $2880 equals $2160 insavings due to simple financial planning. The bigger the numbers, the bigger the savings.
There are many legal tricks available to save parties money, and more importantly, get the two sides to agree. If spouse 2 gets more money than they would otherwise, and Spouse 1 saves more then he would otherwise, compromises become a lot easier. Posted on February 9, 2008 by John Steele
No this is not a post about the two certainties in life, but rather how one affects the other.
I will not pretend to even scratch the surface of tax law in a blog post, just a couple of helpful tips:
If you are married at 12:00 midnight on December 31st of Year X, you can file a joint return. If you get divorced on Dec 30th, you CANNOT.
Alimony (its now called Maintenance for P.C. reasons) is not taxable to the person giving it, it is taxable to the receiver. The opposite is true for child support. This is very important (see the next point)
Oftentimes, the two spouses are in different tax brackets. So $1000 in gross income might equate to $650 in after tax income to one spouse and $800 to another. If spouse 1 in the higher tax bracket can shift the tax burden to spouse 2, spouse 1 can give more money and still pay the same in taxes:
Scenario #1
Spouse 1 pays $1000 in monthly child support, no reduction in taxable income or tax bill. His tax bill on the money he does not see is $4200. Ouch.
Scenario #2
Spouse #1 pays $1200 in monthly alimony, reduces his taxable income by $14,400, reducing his tax bill by $5040. Reduce that savings by the extra $2400 he pays for the year ($200 a month more), and he still saves $2650. Spouse 2 has to pay tax on alimony, but since their tax bracket is normally MUCH lower, spouse 2 either pays none, or minimal tax. Even if Spouse 2 is in the 20% bracket, they only pay $2,880. The difference between $5040 and $2880 equals $2160 insavings due to simple financial planning. The bigger the numbers, the bigger the savings.
There are many legal tricks available to save parties money, and more importantly, get the two sides to agree. If spouse 2 gets more money than they would otherwise, and Spouse 1 saves more then he would otherwise, compromises become a lot easier.
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