Saving On Taxes with “Strategic Divorce”
CNBC has published an article regarding couples considering “strategic divorce” in order to cut their tax bill.
In essence, the theory behind strategic divorce is that high-income couples who jointly file their income taxes are subject to a “marriage penalty,” but such a penalty can be avoided by divorcing and therefore filing separately. For such couples, the question may boil down to whether their marriage, at least in the legal sense, is worth the additional tax obligations.
As the CNBC article points out, divorce can be financially beneficial to many couples in additional instances — and not merely for wealthy couples seeking to avoid tax obligations. For some couples, a divorce may allow for assets to be protected when an ill spouse seeks to qualify for Medicaid. In other situations, a divorce may be financially beneficial by creating a greater combined Social Security Income award. Furthermore, financial aid available for a child pursuing his or her college education may increase if the child’s parents are established as legally divorced.
Of course, the question of whether to divorce usually involves factors well beyond tax planning, asset preservation, Social Security benefits and financial aid for a child’s education.
Under prior law, an award of alimony / maintenance (tax deductible by the higher earning spouse) could also serve to reduce that party’s taxable income and lower that party’s tax bracket (and potentially lower the combined tax burdens of the parties). Under the recent changes to the tax code resulting from the Tax Cuts and Jobs Act (TCJA), that deduction is no longer available to the maintenance payor.
For those considering exploring such options, a consultation with an experienced divorce attorney is well-advised.