February 3, 2019
It is important to review and discuss tax planning for the year in which a divorce was completed, especially for high earning individuals who receive incentive compensation and plan to be divorced by December 31, 2018.
As part of the 2017 Tax Cuts and Jobs Act, many tax law changes became effective in 2018. One change was to the flat tax rate that is withheld by companies on incentive income such as bonus income, commission income, exercised stock options, and vested restricted stock. As of January 2018, the federal rate changed from 25% to 22%. The Minnesota state rate remains the same at 6.25%.
Most highly compensated individuals have marginal tax rates above 22%, so tax on the above income types is under-withheld. To avoid an unpleasant tax surprise come April 15th, be sure to address this potential additional tax liability and come up with a plan to handle it.
Some options to consider are:
- Estimate the tax liability now and include and allocate it as part of the property division.
- Include language to share in the tax liability when return(s) are filed next year.
- Consider whether it makes sense to load-up itemized deductions from the year to the higher earning spouse to help offset liability (i.e. real estate taxes, mortgage interest, charitable contributions).
ABOUT THE AUTHOR
AJW Financial, Inc.
Amy Wolff’s clients describe her as a financial educator and coach. She listens to their diverse concerns and guides them through life’s most stressful transitions toward confident financial literacy and independence. By remaining accessible and open to any question, Amy helps clients avoid pitfalls and make decisions today that align well with their plans long-term. Her approach to personalized financial guidance has given countless clients a non-judgmental place to make well-reasoned financial decisions for their futures and their loved ones.
Amy is a CERTIFIED FINANCIAL PLANNER™ professional and a Certified Divorce Financial Analyst® practitioner. Feel free to learn more at www.ajwfinancial.com.
Amy Jensen Wolff, CFP®, CDFA®
3300 Edinborough Way, Suite 550
Edina, MN 55435
Amy Wolff is a Registered Representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker/Dealer and a Registered Investment Advisor. Investment advisory services also offered through AdvisorNet Wealth Management. Cetera is under separate ownership from any other named entity.
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