When it comes to tax planning for divorce, the rules and ramifications for divorcing couples frequently change. Case in point: President Biden’s proposed new individual income tax plan which is included in the American Families Plan. The plan, if and when enacted, could significantly impact divorce and tax plan considerations, so it pays to be aware and be prepared. Here’s what divorcing couples should know about this proposed tax plan:
Big-picture Tax Implications from the American Families Plan
According to information on Taxfoundation.org, the following are among the major tax changes proposed in the American Families Plan:
- Increasing “the top marginal income tax rate from 37 percent to 39.6 percent, which would apply to income over $452,700 for single and head of household filers and $509,300 for joint filers”
- Taxing long-term capital gains and qualified dividends as ordinary income for taxpayers with taxable income above $1 million, resulting in a … new top marginal rate of 39.6 percent.” (This is nearly double the previous rate of 20%)
How could these big-picture implications affect tax planning for divorce?
New Tax Plan Divorce Consequence #1: Fewer Assets to Split
In the aftermath of a finalized divorce, it is common for one spouse to sell certain assets received in the divorce settlement. Whether this sell-off is to downsize, dispose of unneeded or unwanted assets, or to make ends meet, this asset disposition could have the unintended effect of triggering tax issues, namely the 39.6% capital gains tax proposed in the American Families Plan.
New Tax Plan Divorce Consequence #2: Reduced Tax Breaks for Sale or Transfer of Real Estate
If the divorcing couple sells their home or other jointly owned real estate while still married, they may collectively qualify for up to a $500,000 tax break on the proceeds of the sale. However, if one spouse sells after the divorce is finalized, they may only get a $250,000 tax write-off under President Biden’s proposed tax plan.
Given the potential effects of President Biden’s American Families Plan, what moves can divorcing couples make to mitigate shockwaves from their divorce and tax plan?
- Monitor the status of the plan, keeping in mind that effective dates for federal tax rule changes may or may not apply depending on the timelines of your divorce case
- Carefully watch the impact of selling assets post-divorce once the new rules take effect (if passed intact as proposed), as asset disposal could trigger capital gains penalties
- Regarding the sale or transfer of real estate, be aware that time is of the essence: selling the real estate while still married could entitle the couple for up to a $500,000 tax break on the proceeds but selling post-divorce under the American Families Plan may net only a $250,000 tax write-off
- It is wise to consult with your divorce attorney regarding concerns about tax changes and conditions and the timing of your divorce
At Ciyou & Dixon, P.C., we have 25+ years of experience successfully advocating and resolving divorce cases for our clients. However, we do not provide tax advice but bring in tax experts when needed to help in any given case. To learn more about how to protect your rights and your assets during and after divorce, contact us today at (317) 951-9373. We’re here to help.
This blog post provides general educational material about tax planning for divorce. This is not tax advice and the firm provides no tax advice. Being an educated legal consumer can help you make the most of the legal experience in meeting your legal objectives. This information is presented by attorneys at Ciyou & Dixon, P.C. who practice throughout the State of Indiana. It is not a solicitation, nor is it intended to provide specific legal advice or tax advice. Information contained herein is subject to change.