For High Income Earners, Time for a ‘Tax’ Divorce
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The Fiscal Times
January 4, 2013

Click the Huffington Post’s “divorce channel” (yes, they have one) and you’ll see a typical women’s magazine story about the 10 signs you’re headed for a divorce.  You’ve heard it all before:

• Forget being on the same page, you're not even on the same book.
• You’ve outgrown her
• He doesn’t fulfill your needs
• You’re staying together because of the kids
• Blah, Blah, Blah

Of all the known reasons for getting a divorce, we bet you never heard this one before. You both make too much money to stay together! Sounds ridiculous, right? But the new fiscal cliff tax law that saved 99 percent of the country from massive tax hikes made a beeline for love-struck yuppies. 

Meet the new George and Martha—two investment bankers who fell in love over a bottle of Barolo while students at Wharton. They were made for each other:  they had the looks, the lifestyle, and the resumes that Wall Street firms bid for. 

As their earnings and bonuses increased, they bought a 2,000-square ft. apartment in the heart of New York’s Tribeca. This was a paint-by-numbers picture: designer clothes, Hamptons weekends, movie premieres, and trips to exotic places. Before long they were each making about $400,000 a year. And, thanks to the Bush-era tax cuts, they were able to keep a lot of that money and live the high life. 

That was before the tax deal that would save the country from recession and make George and Martha a bullet point on “signs you may be heading for divorce.” The new law raises taxes on couples making more than $450,000 and individuals making more than $400,000. When their accountant told them they may have to limit their deductions because of their joint incomes as well, they asked her to run the numbers and come up with an alternative. 

At their next meeting, she presented them with two options—file as a married couple and pay the piper, or divorce and file as “single.” As it turns out, George and Martha would save over $27,000 a year if they divorced. And so they did. But they’re still together, in some ways closer than ever. 

They started their own business geared to couples like them called “MisMatch.com.” They analyze peoples’ taxes based on marital status, types of investments, etc., and try to save people a bundle.  George and Martha’s next step—design new software to compete with the big tax programs for people at all levels of the tax code….and be able to change it on a dime.


The Fiscal Times worked with a new tool from the Tax Foundation.  My Tax Burden  is an easy-to-use calculator that has been updated to help get an idea of where they stand with the Internal Revenue Service for 2012 and 2013. 

The Time to Get Divorced

 

Single

Married

 

2012 Actual

2013 Tax Law

2012 Actual

2013 Tax Law

Wages$400,000$400,000$800,000$800,000
AGI$427,500$427,500$855,000$855,000
Deductions$53,800$44,675$107,600$83,350
Taxable Income$373,700$382,825$747,400$771,650
AMT$4,239$2,285$0$0
Net Income Tax$109,613$110,273$225,230$247,829
Effective Federal Income Tax Rate26%26%26%29%
Payroll Tax$10,424$15,694$20,848$32,739
Total Tax$120,037$125,967$246,078$280,568
Effective Total Federal Tax Rate28%29%29%33%
Total Taxes for 2 People$240,074$251,934$246,078$280,568
Savings From Divorce$6,004*$28,634***not worth it
**totally worth it
Source: Tax Foundation
Editor in Chief Jackie Leo, former EIC of Reader’s Digest, Consumer Reports, and Editorial Director of ABC News’ Good Morning America, is an award-winning journalist and author. The Fiscal Times is her 4th start-up venture.