Although the American people avoided the fiscal cliff, legislators passed the Taxpayer Relief Act, which raised the tax rate for individuals who make over $400,000 per year. While imposing taxes on the top income-earners was not a surprise to many, Minnesotans need to understand how they may be implicated in a divorce.
When a married couple divorces, oftentimes, one of the ex-spouses will owe the other party alimony, which is typically a certain portion of the income the higher earner receives. There can be significant tax consequences involved with alimony since it is considered taxable income.
Property settlements and spousal support agreements after a divorce can be uniquely tailored to any situation. It is important that divorcees understand the consequences of certain agreements before, after, and during marriage and how best to structure the split of their assets. In come cases, the tax burden may lessen the value of certain assets.
Drafting prenuptial agreements, divorce settlements, and spousal support agreements can be an incredibly complicated process. Depending on the income and needs of each spouse, a spousal support agreement can control which spouse pays more taxes. While alimony is generally taxable income, divorcees may also structure their agreement to be non-taxable and non-deductible for the person who pays the alimony.
In essence, alimony agreements and property settlements are not one-size-fits-all. Divorcees might consider consulting local specialists regarding their situation and get advice on how to structure the split. This advance planning will not only help them secure the best deal, but also, it can help to minimize tax consequences. As laws continue to change, it is important to keep up-to-date with the current laws in order to optimize one’s situation.
Source: Forbes, “Divorcing Women: Will The New Tax Laws Impact Your Divorce Settlement?” Jeff Landers, Feb. 20, 2013