Couples Can Save On Taxes By Divorcing: But Will Their Relationship Survive?

8 August 2017
 Categories: , Blog

An increasing number of couples are turning to a unique way of saving money on their taxes by divorcing. However, this change can put a serious strain on their relationship. That's why it is important to understand the benefits and weigh whether or not it is worth risking a happy marriage.

There Are Many Tax Rules That Seem To Punish Married Couples

While many married couples can save on their taxes by taking advantage of certain deductions, other couples seem to get punished. For example, the phase-out for itemized deductions is limited to $250,000 for single tax payers while it rises to only $300,000 for a married couple. As a result, high-earning couples stand to lose these important deductions when filing their taxes.

Even stranger, federal tax law has an inherent tax penalty when couples make a large amount of money. This penalty can often be very expensive and drives many couples to consider divorce for tax purposes. Divorce would help them avoid the itemized deduction problem by creating a $250,000 threshold for both of them, not $300,000 for the whole house. However, divorce has other tax benefits worth considering.

Unmarried Couples Can Claim Certain Property Deductions

When unmarried couples itemize their deductions, they can actually list may aspects of their property. For example, they can itemize property taxes, mortgage insurance premiums, and mortgage interest. These deductions can be split between the cohabiting couples and their tax returns, rather than focused on just their joint filing. As a result, they can save more money.

These deductions get complicated by the more properties that a divorced couple owns. For example, owning rental property requires couples to split up both the expenses and income earned by their property ownership. The biggest complication, though, may occur if the couple decides to actually split up after the divorce.

A Cohabitation Agreement Is A Good Idea After This Divorce

Getting divorced for tax purposes is a good idea for the right couple but may put a strain on their relationship. For example, it may be hard for them to explain their divorce to others or lead to resentment if one member was pressured into the divorce. That's why a cohabitation agreement is a good idea. It works like a premarital agreement to split up finances and property in an equitable way.

While a strong couple divorcing for tax purposes should be able to get through the difficulties of the process, it may not be right for everyone. That's why it is so important to talk to a divorce attorney beforehand. They can provide a guiding light through the process and help a couple decide if the stress of divorce is worth the tax breaks they'll earn.