Divorcing for tax purposes

[GrandWino]

@Terr

Another interesting twist to this: Obamacare handout rules apparently favor, hugely, someone divorcing in certain situations. To the tune of $10K per couple.

Do you have to drop these turds in every thread?

[Northern_Piper]

According to the federal General Accounting Office, there are 1,138 provisions in the federal statutes where rights, responsibilities and benefits under federal law are linked in some way to marriage. See the wiki article on “Rights and Responsibilities of Marriages in the United States.”

Rights and responsibilities of marriages in the United States

Now obviously, not all of those apply to every couple, but it’s a pretty significant list. You can’t be sure if and when you’ll need to access those rights and responsibilities. As well, you and your ex-wife can’t compel the federal government to extend those statutory provisions to you and your ex, just by a contract between the two of you.

And that’s not counting state laws. Odds are, each state has a similar long list of statutory benefits and obligations which are tied to marriage.

Are you and your wife sure you want to opt-out of all those benefits and responsibilities?

[Fiveyearlurker]

Wish I just had the option of filing single. I don’t know why the government would prefer me to get divorced!

If anyone is interested, there is an online calculator to see if you are getting screwed:

http://taxpolicycenter.org/taxfacts/marriagepenaltycalculator.cfm

[Joey_P]

@KneadToKnow

In my state, to get a divorce you have to live “separate and apart” from your spouse for a year before you can file, and part of filing is signing a legal document that affirms that you did so. So, assuming you mean you’re looking to get divorced but not split up, it sounds to me like you’d be committing some perjury and/or fraud in North Carolina.

In Wisconsin you just have to wait 120 days between filing and the actual divorce.

@Procrustus

I’ve been married three times. No government official ever asked me if I was in love.

I don’t remember what the application/certificate or any official asked but was there any wording that asked (or rather implied) if it was a marriage of convenience?
The OP is basically asking about a divorce of convenience.

[Fiveyearlurker]

I actually think it would be decidedly inconvenient!

[dracoi]

@Fiveyearlurker

My wife and I have worked hard, and are both earning good salaries. So, I can’t complain too much. But, I will anyway.

I’ve run an estimate of our taxes for next year the way we always do it, married filing jointly. I also took a shot at estimating the taxes if everything were exactly the same, but instead of being married, we were both single. The results were somewhat enlightening; we would save A LOT of money on taxes if we got a divorce.

I don’t see a downside to this plan, except for one little thing. There is something of an emotional attachment to being “married” even if divorce were simply a financial decision. I have no religious issues with not being “married” and continuing our lives as they currently are.

Anyone else in this position? I can’t be alone here! Have you considered divorce?

The “marriage penalty” is rarely large enough to make divorce worthwhile, even in extreme cases. Plus, the penalty can vary from year to year, especially if you have changing income levels. When you look at the inconvenience in all other areas of the law (including things like medical visitation rights and inheritance law), saving a little on taxes just isn’t worth the hassle. Some states do allow heterosexual couples to use Registered Domestic Partnerships to restore some of those rights but still…

Also, if you’re finding a very large marriage penalty, it’s possible that you’re doing something wrong. I once fixed the taxes for a couple who thought they’d file separately using TurboTax and save big time. Part of the reason for their perceived savings was that they each claimed each of the kids and they each claimed the full deduction for mortgages and property. So, yeah, if you artificially double all your deductions, obviously it’s going to look better. When I finally fixed the returns (after the IRS sent them nasty letters), I showed them how the difference was actually only about $500 between correctly filing married vs correctly filing single.

[Idle_Thoughts]

@Terr

Another interesting twist to this: Obamacare handout rules apparently favor, hugely, someone divorcing in certain situations. To the tune of $10K per couple.

Take anything Obama related to its own thread and don’t make this one about it. Thanks.

[Terr]

@Idle_Thoughts

Take anything Obama related to its own thread and don’t make this one about it. Thanks.

This thread is about divorcing for tax purposes. Divorcing to get the Obamacare “tax credit” is “divorcing for tax purposes”.

[DummyGladHands]

You cannot obtain all the benefits of marriage through contracts alone. As just one example, if one partner dies, you don’t benefit from the inheritance tax exemption. There are hundreds of such examples which cannot be contracted around–from Social Security to the FMLA to Hospital visiting policies.

(2) The cost of hiring the lawyers to do this is usually several years worth of the penalty.

I believe the inheritance issue can be gotten around with a trust, each of you putting everything in to a (I think it’s called) pour over or some such trust, to each other upon death, and it’s revokable of course.

Hospital visits, not a problem, part of our trust makes each other the official partner for all things medical, including say pulling the plug and hospital visits.

Social Security, well, since you both have good incomes, maybe you are both at the top of your earning for same. Now, if unmarried and something happens to the other, the survivor cannot collect the decedent’s SS, if that is a concern.

Our trust cost us $2K each.

[Bridget_Burke]

@Northern_Piper

…Are you and your wife sure you want to opt-out of all those benefits and responsibilities?

The OP hasn’t mentioned discussing this with his wife–the mother of his children. Sounds like he’s building a case for divorce before telling her his plan…

[astro]

[Based on this chart](Effects of Marriage on Tax Burden Vary Greatly with Income Level, Equality) and article for the marriage penalty to be significant (5 figures or more) you would both have to be making pretty high incomes (well into the six figures). If you have that kind of cash flow divorcing may save 10-15K per year, but to be in that bracket your incomes would have to be hundreds of thousands annually. Breaking the family (with kids) in two to save a relatively modest percentage of your income seems kind of self defeating.

If you are considering divorcing to save in the 4 figures per year or less then I’m not sure you are looking at the overall picture correctly.

[astro]

@astro

[Based on this chart](Effects of Marriage on Tax Burden Vary Greatly with Income Level, Equality) and article for the marriage penalty to be significant (5 figures or more) you would both have to be making pretty high incomes (well into the six figures). If you have that kind of cash flow divorcing may save 10-15K per year, but to be in that bracket your incomes would have to be hundreds of thousands annually. Breaking the family (with kids) in two to save a relatively modest percentage of your income seems kind of self defeating.

If you are considering divorcing to save in the 4 figures per year or less then I’m not sure you are looking at the overall picture correctly.

Correct chart /article link here
http://taxfoundation.org/article/effects-marriage-tax-burden-vary-greatly-income-level-equality

[Terr]

@astro

[Based on this chart](Effects of Marriage on Tax Burden Vary Greatly with Income Level, Equality) and article for the marriage penalty to be significant (5 figures or more) you would both have to be making pretty high incomes (well into the six figures). If you have that kind of cash flow divorcing may save 10-15K per year, but to be in that bracket your incomes would have to be hundreds of thousands annually. Breaking the family (with kids) in two to save a relatively modest percentage of your income seems kind of self defeating.

In order for Obamacare marriage tax penalty to be about 10K, the total income of the couple only has to be $62K. Is that a good enough incentive?

[Idle_Thoughts]

@Terr

This thread is about divorcing for tax purposes. Divorcing to get the Obamacare “tax credit” is “divorcing for tax purposes”.

@Terr

In order for Obamacare marriage tax penalty to be about 10K, the total income of the couple only has to be $62K. Is that a good enough incentive?

Take it to ATMB if you have any questions…but my note stands. Make your own thread about it. Do not create a off-topic hijack in this thread or you will be warned.

[robert_columbia]

@Joey_P

…
B)The judge doesn’t ask why you’re getting divorced, other then if the marriage is broken or if there are irreconcilable differences (I don’t remember which question it is), but you could say yes. You could even convince yourself you’re not lying (irreconcilable differences with WHO? etc) Eitherway, they’re not doing any digging. No one would know, you wouldn’t be forced to remarry.

Iirc, in a lot of jurisdictions nowadays, the very fact that one spouse has filed for divorce is sufficient evidence that there are irreconcilable differences.

I know that some churches do not recognize court divorces, or only recognize them if they also comply with church requirements. If you are religious and value being married in the eyes of the church, one possibility could be a legal divorce that was intentionally engineered to be invalid according to the rules of your church and thus the church would continue to treat you as married. I understand that an analogous process happens in some European countries where people will “resign” from their church on a government form in order to stop tithes from being automatically withheld from their income, knowing that they are still a follower and expecting the church to treat the act as a financial one, not an actual apostasy.

[Fiveyearlurker]

I wanted to revisit this question now in lieu of a new ruling by the IRS:

http://www.bloomberg.com/news/articles/2016-08-19/another-good-reason-not-to-get-married-courtesy-of-the-irs

Now, in addition to the marriage tax penalty my wife and I are paying, if we got strategically divorced, we could essentially double the amount of our mortgage interest deduction. We live in a very high cost of living area, and we pay a lot of money in mortgage interest. Doubling that would be huge. Even without that, our penalty was substantial (Previously estimated at about 13K per year). With it this new ruling, I feel like a sucker for being married.

We are now consulting with a tax expert to run the last few years numbers as an unmarried couple, and while we haven’t gotten the numbers back, he is telling us it is likely to be a very substantial amount of money. Getting married is, apparently, for absolute suckers.