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Divorce as an alternative to high-income tax problems?

A lack of common ground, growing in separate ways and third-party relationships are some of the many reasons married couples separate and split. Financial problems that lead most spouses to divorce usually have to do with a lack of income, not an excess amount of financial good fortune.

Now, some well-off New York couples are being advised to divorce even when they're fully satisfied with marriage. The 2013 federal tax law that prevented middle class and poorer taxpayers from plummeting off the fiscal cliff packed a wallop for individuals and couples with annual incomes above $400,000.

High earners had long-term money protection from a series of tax relief measures initiated during the George W. Bush administration. Tax rates on income, capital gains and dividends were low. Personal and itemized deductions were plentiful and estate taxes were manageable.

The financial shock for upper income earners hit on the first day of 2013 with the disappearance of Bush-era tax benefits and the enactment of the Taxpayer Relief Act. Taxpayers with yearly incomes of more than $400,000 and couples with jointly-filed incomes over $450,000 suddenly had new, higher tax rates.

The tax law dried up credits and tax deductions for individuals with more than $250,000 in income and couples with joint taxable earnings of over $300,000. Taxes shot up to 40 percent on estates worth more than $5.25 million.

Wealth and marriage suddenly created a tax burden that some couples may not be willing to carry. Spouses might have to contemplate whether marriage is worth tens of thousands of dollars a year or more in extra tax payments.

Although some New Yorkers may find the advice unusual or even immoral, some accountants now include divorce among money-saving alternatives for high-income couples.

Few couples view marriage or divorce solely through a financial lens. Financial, tax and legal counselors can provide advice that may avoid thoughts of divorce for tax purposes.

Source: thefiscaltimes.com, "For High Income Earners, Time for a 'Tax' Divorce," Jacqueline Leo, Jan. 4, 2013

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