By Lee Sherman
Beginning with the Trump Administration’s tax reform in 2018, higher earners have been forced to pay a “marriage penalty”. High-income couples who file jointly and are in the 37% tax bracket have a higher tax liability and this situation could get even worse for them depending on which way the political winds blow this November. Consider that Senator Elizabeth Warren’s proposed wealth tax would impose a 2% annual tax on wealth over $50 million and a 3% tax on wealth over $1 billion. An ultra-wealthy couple worth $100 million would end up paying $1 million a year in taxes. But, if they divorced, they wouldn’t owe any tax at all. A similar proposal, unveiled by Senator Bernie Sanders, levies a 1% tax on wealth above $32 million for married couples (while gradually increasing the tax for even wealthier households).
Does this mean they want to incentivize divorce? Well, not exactly. But the recent fashion for taxing the rich could have unintended consequences. At the very least, tax laws such as this, should they pass the legislature, may encourage wealthy individuals to give more to charity or consume less. According to many accountants, divorcing in order to take advantage of this loophole is entirely legal so long as the couple works with an experienced divorce lawyer and follows the proper procedures. The IRS isn’t generally in the business of matrimony.
A “strategic” divorce means the couple is dividing their assets but not necessarily separating. In community property states, the assets should be divided evenly. Even if a couple doesn’t fall into the category of the super-rich however, there are still reasons to consider a strategic divorce. When a couple separates their finances and reduces their assets, it may allow one party to more easily qualify for certain kinds of financial aid such as Medicaid or student loans (as odd as divorcing to send a kid to college may sound).
However, there’s a reason why most laws in our country favor married couples. The downsides of such a plan may outweigh the benefits, especially if you are in a lower tax bracket.
Health Insurance: In many marriages, both spouses receive health insurance benefits through one spouse’s employer, saving thousands of dollars a month in insurance premiums. In the case of divorce, one spouse could end up paying full health care costs from their ex’s employer.
Retirement: If one spouse is working outside the home, they are most likely receiving retirement benefits such as a 401(k)) through their employer. The other spouse is automatically a beneficiary but not in the case of a divorce.
Business: If one spouse owns a business, they may be required to divest it and split the proceeds with their ex.
A strategic divorce tends to assume that both parties are amicable and may even want to remain a couple afterwards. But if you really want to change your relationship status from married to “it’s complicated” you should definitely seek out a family law attorney.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.