New Tax Laws May Lead To Surprises In Divorce Settlements

The beginning of the New Year is a popular time for a fresh start. For some, this fresh start includes filing for divorce. According to legal and financial professionals, filings for divorce are highest during the beginning of the year.

There are many potential reasons for this trend. Some experts speculate parents attempt to provide one last holiday season as a "family" before officially moving forward with a divorce, while others contend the couple may be concerned with the impact a divorce will play on taxes.

Regardless of a couple's reasons for taking the step to file for divorce, it is important to know how this year's tax laws will impact a divorce settlement.

How tax changes can impact your divorce

The American Taxpayer Relief Act, signed into law on January 2, 2013 by President Obama, was enacted as an attempt to address the looming "fiscal cliff." This piece of legislation impacts various areas of tax law, including:

  • Bush-era tax cuts
  • Child tax credit

The American Taxpayer Relief Act extended reduced tax rates enacted during the "Bush-era tax cuts." This extension impacts those who earn less than $400,000 when filing singly or $450,000 if filing jointly. Anyone who earns more than these limits is taxed at a higher percentage. Last year, the tax rate for this group was 35 percent, this year it was raised to 39.6 percent.

As a result, those seeking a divorce in 2013 may want to take a closer look at their alimony plans. Anyone who receives an alimony payment must claim it as income on their taxes, while those making alimony payments can claim a deduction. Those who are close to the $400,000 limit may want to structure their settlement with these limits in mind.

The second noted change, the child tax credit, was extended through 2017. If children are present, it is important to discuss who will claim them as dependants. In order to qualify for the tax credit, additional criteria must be met. These criteria include a range of factors, such as whether the child lived with the taxpayer and whether the taxpayer provided financial support for the child.

These and other changes to tax law make it more important than ever to carefully review a proposed divorce settlement. If you are considering a divorce, contact an experienced divorce attorney to discuss your unique situation and help better ensure a divorce settlement suits your needs.