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Taxpayer Relief Act may change asset division in some divorces

High-income couples who divorce this year are facing a new tax landscape, thanks to the American Taxpayer Relief Act. While Congress avoided sending the country over the fiscal cliff, the new law presents a bit of a learning curve for everyone involved in the breakup of a marriage.

High earners in Lake County have probably heard by now that the tax rate on earnings of $400,000 and up increased to 39.6 percent. They are also aware of the new 3.8 percent Medicare surtax on capital gains and other investment income for individuals and couples who meet certain income thresholds. When couples sit down to negotiate spousal support, child support and division of assets, these laws make the math a little more complicated.

For example: Husband earns $2 million a year, and Wife does not work. They have a very comfortable lifestyle that she says will cost $800,000 a year to maintain after the divorce. If she takes that in alimony, though, she has to report it all as income, and he can deduct it from his income. It hardly seems fair.

Instead of just handing over cash every month, Husband could take on upkeep for the homes that will be transferred to Wife in the settlement. Association dues, regular maintenance and property management fees would be off her plate, as would a big chunk of taxable income.

As for their investment portfolios, the Medicare surtax makes outright transfers and liquidation of assets less attractive. One financial consultant says he sees couples taking a harder look at which assets will be taxed now and which will be taxed later, then trying to balance out each spouse's share.

The process of analyzing and dividing assets in a divorce differs from couple to couple, of course. The new tax laws will not change that process, but they will probably mean a different outcome from what some couples expected.

Source: Wall Street Journal, "New Taxes Make Divorce Trickier," Arden Dale, Feb. 1, 2013

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