Issue link: https://viewer.e-digitaledition.com/i/138456
thinking about a tax or Benefits Divorce? by michael t. Livesay, Cpa/pfS J thought you had heard all the reasons for getting divorced, the media has reported that a number of people are considering a friendly divorce for economic reasons. Referred to as "tax divorce" or "benefits divorce," the objective is to either pay less tax or qualify for subsidies while continuing to live together and function as a married couple. While "benefits divorce" has been around for quite some time, "tax divorce" is a fairly new phenomenon based on the tax laws passed earlier this year. The typical couples considering a "tax divorce" are dual high-income earners. For example, consider the hypothetical case of a couple who each earn $400,000 in wages, own a home, have two children and have combined investment income UST WHEN YOU of $50,000. The approximate income tax burden (including federal, Ohio, city, social security and Medicare taxes) they would have paid in 2012 is $303,000. In 2013, that burden would climb to $333,000. If that same couple were divorced with one of the spouses claiming head of household status and the other claiming single status, in 2012 they would save approximately $4,000 of taxes as compared to being married. However, that savings jumps to approximately $28,000 in 2013 because the tax brackets are more favorable when spreading the income over two single filing statuses than combining into one married filing status. The objective of the "benefits divorce" is to make a non-working spouse appear "poor" in order to obtain subsidies for the family from the government and/or others while the family's income and living arrangements remain the same. The goal is to obtain assistance paying for childcare, health care, food, housing, utilities, tuition, cell phones, etc. Are these valid options that can be legally pursued? Probably not. The potential problems that can crop up are numerous — including loss of spousal death benefits for social security, retirement payouts and tax-free estate transfers. And what about the moral issues? How will this affect an individual's relationship with God? With a spouse, children, parents and/or friends? With so many divorces happening unintentionally, it would be sad to see "tax divorce" or "benefits divorce" as a new financial planning tool. In order to discourage this, I believe the lawmakers should be looking at household income — not marital status — when determining tax rates to be paid and/or benefits to be received. Marriage penalties should be eliminated, not exacerbated. Mike Livesay is a CPA and principal of Weidrick Livesay & Company in Akron, OH. ■ JULY-AUGUST 2013 ■ MDNEWS.COM ■ MD News Cleveland/Akron/Canton | 33