Biden’s plans could drop a tax bomb on divorced couples
Divorce isn’t easy, and President Joe Biden’s recent proposal could bring a tax surprise to couples who consider it ended.
Biden wants higher taxes on the richest 1% to help fund education, paid vacation, childcare, and other social programs that impact those who earn more than $ 400,000.
The proposal envisages raising the highest income tax rate from the current 37% to 39.6%.
Top earners may also pay nearly double for long-term capital gains, up from 20% to 39.6% without the 3.8% premium for Obamacare.
More from Personal Finance
How Biden’s real estate tax plan can hit smaller real estate investors
Biden’s Inherited Real Estate Plan can affect more people than just the rich
How Biden’s Capital Gains Proposal Could Hit Medium-Sized Home Sellers in Burning Markets
“The implications of Joe Biden’s proposed tax plan are quite significant,” said certified financial planner Stacy Francis, president and CEO of Francis Financial in New York City.
Without strategic planning, the tax implications for divorced people could be drastic, she said.
Less assets to share
One of the biggest challenges divorced people face is paying for two households.
Higher taxes mean less cash flow to cover the cost of living, said Aviva Pinto, executive director of Wealthspire Advisors in New York City.
“We see the standard of living for men and women dropping after divorce,” said Francis.
A spouse may have to sell the assets obtained in the divorce proceedings to make ends meet, which can lead to tax problems.
For example, let’s say a spouse sells a portfolio of $ 500,000 with significant profits over the past 15 years.
The sale will significantly increase the spouse’s annual income and expose profits to Biden’s proposed 39.6% capital gain rate, Pinto said.
So often, people are just looking for the finish line of divorce. They do not think about how they will steer their lives afterwards.
President and CEO of Francis Financial
The proposed tax changes could also affect home transfers, said Eric Toya, CFP and partner at Navigoe in Redondo Beach, California.
For example, let’s say a divorced couple bought a home in California for $ 250,000 decades ago, and the property is now worth $ 1.7 million.
If the couple sells during the marriage, they may qualify for a tax break of $ 500,000 on the profit. If a spouse sells it after the divorce, they may only receive a tax write-off of $ 250,000.
“It’s one of those things that a lot of divorced couples don’t think about,” Toya said.
If that spouse sells the property for $ 1.7 million, they can increase their annual income to over $ 1 million, risking the higher tax rates on some of their home profits.
Combined with state taxes, the highest capital recovery rates in California could be over 50%, according to the Tax Foundation.
Tips for divorced people
While the future of Biden’s proposals is unknown, Pinto said couples planning a separation might consider finalizing their divorce before the new laws go into effect.
“Don’t make it long,” she said. “A lot of dishes are opening right now and there is a huge backup.”
Divorced people also need to plan the after-tax effects of real estate transfers such as investment portfolios or home ownership. You may need to consider the tax bite, especially for assets with significant gains, Pinto said.
“Fight for money,” she recommends.
After the divorce, a new individual investor will have to change their investment portfolio frequently, Francis said.
Those looking to swap investments could avoid higher taxes on profits by making changes before the new laws, she said.
“So often, people are just looking for the finish line of divorce,” Francis said. “They don’t think about how they will steer their lives after that.”