Get Divorced For Money!

(Or Why Congress Wants You to Live in Sin)

by
EvaRosenberg

A couple of years ago I got tired of listening to my boyfriend complain about his taxes and told him, "It's time to get married." So he did — to his girlfriend — and saved more than $12,000. (Okay, he was really my former boyfriend.) His is one of the few relationships left for whom the tax structure was designed: A couple with one income. I'd say they're like the TV show Father Knows Best, but her kids are grown and his live with the ex-wife. Do you get the impression they're a typical family these days? Except for the one income source, they are. But Congress still hasn't caught on. Most marital relationships look more like this: Two incomes, one higher than the other, struggling to cover living expenses, debts, contingencies, a dozen different insurances, and some long-term planning. Frankly, if you didn't have to pay taxes, there'd be money to take care of all this. Being married can be extremely costly. In fact, it was such a serious consideration, I almost didn't get married. When I computed the taxes of my fiancé and myself separately, he came out much better on his own. But we got married despite the logic. I haven't been able to convince anyone to get divorced for tax purposes yet, but here goes.

{} Putting Things Into Perspective @ Love, Sex, and the IRS * Early Joints + Top Seven Reasons to Stay Single to Save

Putting Things Into Perspective {} Dealing with the Internal Revenue Service can be a terrifying experience. So many people have had such hostile encounters, they blame the IRS for the whole tax system. Remember, the IRS is only enforcing the laws. Congress writes them. By the time most people reach Congress, they are either quite wealthy or have spent so much time fund-raising that they have forgotten how most of us live. Add to that the fact that, until recently, most Congresspersons were married, often with a non-working, supportive spouse (spelled w-i-f-e). The lawmakers benefit from a tax code that favors one-income households. Now that the composition of Congress is changing, we are slowly starting to see new legislation to help real people — us.

Love, Sex, and the IRS @ When did married couples start getting punished? It seems that as early as 1933, the Treasury Department and Congress started battling this issue. I came across a memo, dated November 19, 1936, that proposes making it mandatory for married couples who live together to file joint returns and to become "jointly and overally liable for the total amount of tax..., penalties, and interest...for such taxable year ... and the Commissioner may assess and collect ...from either the husband or the wife or both of them." This idea took hold and the IRS uses this law to follow the trail of assets. They've been able to collect taxes from individuals for tax debt based on their ex-spouse's income while they were married, filing jointly. (Good news: There is a bill before Congress that will remove this onerous provision!) Prior to this time, people had the liberty to file either as separate individuals or together, whatever gave them the greatest benefit. They could take advantage of the laws of their states — some of which would be frightening to the modern American woman. In common-law Louisiana, for example, "the wife's property, at date of marriage, and all property and income she might acquire after marriage, according to common law, belongs to her husband." (Women also had to provide a copy of their divorce decree or proof that they were single in order to buy property without a husband's permission.) Tax liabilities of couples living in different states varied widely, depending on their state's definition of property laws. Living in a community property state (which requires spouses to split all income 50/50 regardless of who earned it), a couple's taxes could be as much as 40% less than a couple in a common law state earning the same income (usually attributed all to the husband) — $316 per year in California vs $526 in Louisiana. Could taxes (and incomes) ever have been that low?

* Early Joints In 1948, joint filings were introduced. Congress tempered it with a little provision to prevent two-job couples from being penalized. An equalizing credit was created for couples whose earned incomes ranged between $3,500 and $10,000. They placed these limits because it was "rather doubtful that working husbands and wives in these circumstances are particularly in need of relief." (This was the birth of the Earned Income Credit which is now much more valuable to single people supporting a child or two.) An interesting thing happens when laws are written vaguely. The IRS must interpret them for enforcement. That's why we're so conflicted. When joint filings were first required, they forgot to define whether the return would have the deductions for one return or for two people, now filing as a couple. So, naturally, the IRS took the stand that each return was only entitled to one set of deductions. Even now, our joint filers ($6,900) have lower standard deductions than two single people ($4,150 x 2 = $8,300).

Top Seven Reasons to Stay Single to Save + 1) A Greater Standard Deduction. Two single people get a standard deduction of $1,400 more than joint filers (see above). 2) Earned Income Credit (EIC). This is a negative tax. Folks with incomes between $9,100 and $11,950 with at least two children would get back $3,656 from the IRS! That's quite a windfall. For some families, that's the difference between eating and starving. 3) The Business Expenses Penalty. A married couple where one person has substantial business expenses might not be able to use the deduction. But if they lived together and remained single, the person with all the expenses might be able to take full advantage of all those business meals and entertainment. They could save $1,000 or more on this item alone. 4) The Medical Expenses Penalty. This affects only higher income folks who are seriously ill. They often find that out of pocket medical care is much more costly than $8,000. Paying for care providers in the home, as well as living in certain senior care residences, are medical expenses. With care expenses of $25,000, being single can save nearly $5,000 or more for those with incomes of $75,000 each or more. Aside from income tax consequences, there may be other advantages to being single while ill — Medicare, state aid, and so forth. 5) Social Security. Social security isn't taxable as long as your income is less than $25,000. But if you're married, your combined income can be as high as $30,000! Wow! So, if the couple's income is $50,000 and they got divorced, none of the social security income would be taxed. Frankly, this split could save several thousand tax dollars, even if their combined social security income was only around $1,000 per month. 6) The Tax Rate Penalty. As income rises, more issues come into play. Two people who are each financially successful and married get into higher tax brackets much sooner than if they were single. If they earn about $125,000 each, they'd save about $5,000 by splitting up. 7) Real Estate Rental Deductions. The deduction for real estate rental losses is up to $25,000 (provided you meet lots of stringent requirements and rules). Did you know that you lose the amount of that deduction as your income rises over $100,000? The deduction disappears altogether when your income reaches $150,000. As married individuals filing separately, you lose the whole $25,000 deduction! But if you're single and own the property together, you could take advantage of up to $50,000 in real estate losses. So isn't divorce worth thinking about? There's more. Much more. If your relationship is secure; if you are more interested in saving money than saving face, sit down with a good tax professional or good tax planning software. When you get done, it may be time to get divorced.