American Taxpayer Relief Act May Affect You Post-Divorce

StaciMost Americans are familiar with at least some provisions of the American Taxpayer Relief Act (ATRA) that Congress put into effect as of January 1, 2013 in an attempt to avoid the fiscal cliff. What many people may not know, however, is that ATRA may create some sticky financial situations for former spouses once their divorce is final if they fail to take its provisions into account in crafting a settlement agreement.

As recently reported by Forbes, one provision of ATRA significantly raises tax rates for higher income people. Therefore, if you will be receiving alimony following your divorce, you may be pushed into a higher income tax bracket, which now will mean that you owe an increased amount of taxes. In most cases, your periodic alimony payments will be considered to be taxable income by the IRS, and the payments will be tax-deductible for the paying spouse.

In some circumstances, you may be able to structure your divorce settlement to include a single lump-sum payment of alimony, rather than periodic payments, which would result in the payment being neither taxable to you and nor deductible for your soon-to-be-ex-spouse. Relying on a single payment for your alimony income for the rest of your life can be difficult, however, and will require some careful financial planning in order to ensure that you have a sufficient income flow.

Child support, on the other hand, is not considered to be taxable income, and child support payments made are not deductible. Although such an arrangement can be difficult to make, there may be some benefit in seeking more child support and less alimony, as opposed to the less child support and more alimony. Again, the best strategy in this situation will depend on your particular financial circumstances and needs.

As the tax consequences of your divorce can be significant, particularly with the passage of ATRA, it would be wise to discuss your situation with a trusted financial advisor, along with your Oakbrook divorce lawyer.  An experienced divorce attorney will be instrumental in helping you make the decisions that best benefit you financially in the future.

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