Our US Tax author Scott M. Estill walks Americans through five ways that being divorced will improve your tax outlook in 2014. If your conscious uncoupling is getting closer to finalizing, you can take these tips all the way to the bank this year.
Timing is everything
You can wait until December 31, 2014, to determine your tax filing status for 2014. As such, a divorce finalized on New Year’s Eve will have the same effect as one filed on New Year’s Day (for tax purposes). You may thus be able to determine the approximate tax liabilities late in 2014 to consider what the financial differences truly are for being married or single come December 31.
More money, more problems
You may escape the “marriage penalty” with respect to your overall taxes. The tax brackets for married couples are exactly double the amounts for single taxpayers for the 10% and 15% tax brackets. However, once you move up to the 25% bracket (and all tax brackets above this, up to and including the 39.6% bracket), the amounts are nowhere near double for married couples. For instance, two single individuals earning $85,000 each would fall into the 25% tax bracket, but if they were married their combined income ($170,000) would push them both into the 28% tax bracket. There are numerous other examples of the marriage penalty in the current tax laws.
Single file, please
You may pay less in taxes due to the avoidance of the Alternative Minimum Tax (AMT). For instance, a single person gets an exemption of $51,900 for AMT (income not subject to the AMT), while a married couple receives $80,800. Two single taxpayers thus get a combined exemption of $103,800, or $23,000 more than the same couple would obtain if legally married. Similarly, the top AMT tax rate begins at $179,500 for either single or married taxpayers, thus providing another incentive to return to the single life.
All in the family
Alimony/spousal maintenance is tax deductible to the ex-spouse making the payments and is taxable to the ex-spouse receiving the payments. With proper planning, it may be possible to shift income taxes to a person in a lower tax bracket (person receiving the alimony/maintenance) and gain a tax deduction for someone in a higher tax bracket (person making the payments). Please note that payments for child support are not tax deductible and also do not represent taxable income.
Invest in yourself
You (as a couple) have a high amount of investment income. If this is the case and your total income is more than $250,000, you will be facing higher taxes to fund the Affordable Care Act. This includes a 3.8% surtax (in addition to income taxes) on investment income that kicks in at $200,000 for single taxpayers and $250,000 for married taxpayers (another example of the “marriage penalty”). In addition, the highest capital gains taxes are paid by single taxpayers when the income reaches $406,750 and for married couples at $457,600. By way of example, two single individuals could each have $390,000 of income and not be subject to the highest capital gains taxes, while if they were married the combined income of $780,000 would subject them to the highest capital gains tax rates (20% for federal taxes), along with the health care surtax of 3.8% (along with any taxes that may be owed to the state).
Scott M. Estill is the author of TAX THIS! An insider’s Guide To Standing Up to the IRS. He is a tax attorney and former IRS Senior Trial Attorney who operates out of Denver. Follow Scott on twitter at @TaxThis