With a little under two months to go until tax day, some divorcing couples are beginning to receive surprising news from their tax professionals. Could you have a surprise when you’re preparing your 2013 income taxes?
In January 2013, Congress passed the American Tax Relief Act (ATRA).
A compromise measure, the Act gives permanence to the lower rate of much of the Bush tax cuts, while retaining the higher tax rate at upper income levels that became effective on January 1  as a result of the expiration of the Bush tax cuts. The Act also establishes caps on tax
deductions and credits for those at upper income levels
- Wikipedia “American Tax Relief Act of 2012”
This broad-reaching legislation has hundreds of pages, but here is a jargon-free cheat sheet on how the Act affects some important divorce issues:
The Act does not affect the taxation of alimony - the recipient must still claim it as taxable income.
Because of a major provision in ATRA that raises tax rates on high incomes, the recipient of alimony may be bumped into a higher tax bracket: Single-filers who had an annual income greater than $400,000 will now pay a new 39.6% rate; it used to be 35%.
It also affects the division of assets: ATRA sets a new 3.8% Medicare surtax on capital gains, dividends and other investment income above $200,000 for a single filer.
For people who fall into the new 39.6% tax bracket, the federal capital gains tax rate has been increased from 15% to 20%, in addition to the 3.8% Medicare tax.
State tax is a separate calculation. For example, in Georgia our top rate is 6%, so someone who is in the highest bracket would have to pay an additional 6% on top, with their actual tax rate coming close to 45% if they are living in Georgia.
So the big question is, “Is it too late to do anything about this for people who got divorced in 2013?”
Probably, yes. But people getting divorced in 2014 onward can be aware to take action. This is where a good Certified Divorce Financial Analyst or CPA can definitely help.