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Tax concerns for high income individuals who divorce

| Jun 23, 2021 | High Asset Divorce |

Proposed tax changes that call for higher tax rates on high-income individuals could have a significant impact on some divorcing couples. The proposed changes could affect those earning over $400,000 per year. 

Financial experts are saying these changes could drive up the cost of divorce without careful financial planning. 

What would change

The proposal would increase the highest income tax rate from 37% to 39.6%. The tax on capital gains would also increase from 20% to 39.6%.  

How the changes could impact divorcing couples

Because divorcing couples must pay for two households on the same income they were earning before the divorce, one or both ex-spouses may need to sell assets, which can trigger tax issues, such as exposing profits from the sale to the proposed higher capital gains tax rate.  

The proposed higher rate could also impact home transfers. Couples who purchased a home in California decades ago could see substantial profits selling in today’s real estate market. Some people could pay as much as 50% in taxes on the profits from the sale when they combine capital gains with state taxes. 

Financial planning tips for divorcing couples

Couples who are already in the process of divorcing may want to finalize their divorces before these potential changes take effect. Some people may want to prioritize cash over other assets when dividing up the marital property to avoid potential capital gains issues from selling assets.  

There is no guarantee that the proposed changes will take effect; however, couples with high-value assets may want to discuss the potential tax impacts with their financial advisor before finalizing their divorce.