A completely separate analysis from support planning, is evaluating taxes in the current year.
Case facts may be different from facts in the support analysis and you may post two separate cases - one for support and another for tax analysis (Doe Spt and Doe Tax)
Divorcing individuals frequently have questions on the tax consequences of getting divorced in the current year or delaying the divorce until the next year.
By filing as Married Joint, taxes in the current year may be lower than if the individuals were divorced that year. But this is frequently not correct when one party qualifies to file as Head of Household.
The tax legislation of 2003 has generally eliminated the Marriage Tax Penalty for individuals with income under $74,000 in 2008, but the penalty still applies at higher income levels (Married Joint versus Single). The Tax Analysis menu allows you to save the key information from several cases to highlight this decision for your clients.
In non-community property states, tax savings are possible for many individuals in the year of divorce if:
One of the spouses is not employed or makes a lot less than the other spouse, and
Is in the 10, 15% or 25% marginal tax bracket.
Community property laws generally divide income prior to divorce between the parties so that tax bracket equalization is automatic.
In many situations, taxes may be saved prior to divorce by having the high income party make payments under a written separation agreement or a temporary court order for support. Such payments are considered alimony for tax purposes and have the effect of transferring income from a high tax bracket to a low tax bracket.
Payments under a written separation agreement are included in the 3 year excess alimony recapture formula, but payments under a temporary court order for support are not.
The high income spouse will be responsible for all the taxes. However, that party may have significant tax savings (in some cases over $10,000) by using a written separation agreement to reduce the high income party's income and shift it to the lower paid party as compared to the filing of a Married, Joint return.
As married individuals, the higher paid party would file as Married, Separate and the other party might qualify for filing as Head of Household with lower tax rates. See also, Filing Status.
If one of the parties qualifies as Head of Household, that person may take the standard deduction regardless of whether the other party uses the standard deduction or itemizes on the Married, Separate return. This is different from the normal tax rules under which married individuals who choose to file as Married, Separate must both itemize or must both claim the standard deduction.
Under the tax law, high income individuals lose a part of their itemized deductions (2% of the excess of AGI over certain income levels) and also begin to lose the value of their personal exemptions above certain threshold income levels. See Itemized Deductions Phaseout.
Taxes may be reduced if these options are identified and quantified as the divorce process is initiated. Divorce Planner subscribers may quickly review the case facts and generate reports which will indicate tax savings strategies for many clients.
The key is to generate an understandable report which clearly shows clients how taxes would change under different approaches and the Divorce Planner software assists you with two reports which highlight tax strategies for the year of divorce.
Divorce Planner will let you summarize the tax impact of up to 5 cases for the year of divorce. It will also let you evaluate how to significantly increase alimony in the year of divorce and change a property settlement to share tax savings between the parties. The second approach may be useful if income shifting with a written separation agreement has not been used and divorce is to take place late in a year.