Tip of the Month:
Tax Impact of Divorcing in December or January

Do taxes go up or down when people get divorced?  When both parties work, the combined taxes of the 2 parties are usually lower after a divorce. Many times, post-divorce taxes are significantly lower. The tax implications of divorce should be reviewed when a decision is being made on the date of the divorce. The timing of a divorce is sometimes controllable at the end of a calendar year. The filing status for taxes (Single; Head of Household; Married, Joint; Married, Separate) is determined at December 31 so the timing of divorce is very important in determining the ultimate taxes of the parties.

The tax tip is simply “When both parties work and neither party is very low paid, get the divorce in the current year and these individuals will reduce their taxes”. The reason is that the “Marriage Tax Penalty” will be eliminated by divorce.

Marriage Tax Penalty
When the federal income tax rates were increased in 1993, the top rate of 39.6% was set to apply in each filing status at the same level of income.  For 2002, the top rate has been reduced to 38.6% but that one rate applies at taxable incomes of $307,050 or more regardless of whether the filing status is Single, Head of Household, or Married, Joint.

The impact of this is that working couples who file as Married, Joint can pay significantly more federal tax than if the same two individuals earning the same income were not married. This is referred to as the "Marriage Tax Penalty."

This was a significant change from past tax rate schedules in which the "Marriage Tax Penalty" did not exceed about $2,200. In 2002, the "Marriage Tax Penalty" can be as high as $18,959.  (Two married professionals each with Adjusted Gross Incomes of $312,000 will pay additional taxes of $18,959 just because they are married.)

Implications for Divorce
If both parties to the divorce are working and one party is not very low paid, the combined post- divorce taxes of the two individuals will be reduced because the "Marriage Tax Penalty" will no longer be applicable. The timing of divorce should consider this and working couples are almost always better off if the divorce is completed before the end of the year so they do not have to file as Married (Joint or Separate).

The following tables show the impact of the "Marriage Tax Penalty" at different income levels. A Single federal filing status is assumed but a divorcing individual who has a child living with him/her will have additional tax savings from being eligible to file federal tax returns as Head of Household. Additional tax savings from a Head of Household filing status are also shown.  Dependency exemptions are ignored in these tables but an Earned Income Credit of $691for one child is included in the $25,000 party 2 income cases (not applicable at higher income levels).

Annual Tax Savings from Divorce