Subscribe to DSC Newsletter

Here in the US (and I'm sure the same applies everywhere), the middle class is increasingly victim of new tax policies. In US, the AMT (alternate minimum tax) was supposed to target the top 100 wealthiest tax payers, in 1960 when it was created. Now, each year, more and more millions of upper-middle class (income > $100k) are being targeted. Soon it will hit middle-middle class.

In particular, if you earn $300K and your spouse earns $0K (and especially you live in New Jersey and have a few kids and unreimbursed employee expenses), you will save tons of money by being divorced "on paper" (but not in real life). The solution would consist in divorcing and paying a $130K yearly alimony to your ex-spouse (tax-deductible for you) while still living together as if nothing happened.

This involves a bit of analytics, thus my posting in Analyticbridge. In particular, you will have to compute:

  1. Your tax liability if you are married, under regular tax schedule
  2. Your tax liability if you are married, under AMT schedule
  3. Your tax liability if you are divorced, for you, under regular tax schedule
  4. Your tax liability if you are divorced, for you, under AMT schedule
  5. Your tax liability if you are divorced, for your spouse, under regular tax schedule
  6. Your tax liability if you are divorced, for your spouse, under AMT schedule


Then your "divorced" tax benefit is equal to:

                   max(1,2) - max(3,4) - max(5,6) - divorce costs.

There are a few ways to somewhat minimize the impact of AMT, for instance by not working as an employee but instead getting paid as a consultant via your own company. But very few employees have this option or are willing to take this path.

Another question: can the IRS claim that you are "illegally" divorced (that is, the divorce is fake and manufactured solely for tax purposes) and then adjust your tax liability accordingly? And how could they prove that the divorce is fake?

Related article:

Views: 2881

Reply to This

Replies to This Discussion

First, earning $300k annually is not middle class in any country in the world--it is high income, therefore, upper class.

Second, why should one determine one's personal life by their tax liability?   Is that not an inversion values, very much like the critique that Marx aptly made of capitalism?

Third, the AMT is not some extra tax burden but insures that people who can afford to pay a certain minimum:   http://www.irs.gov/taxtopics/tc556.html

Fourth, since the AMT rate is in place of the other rate and under 30 per cent, why bother?

Fifth, the latest tax law connected to the fiscal cliff controversy indexes the rate to inflation.

So, if you really want to do this as an exercise in analytics, go to it, but as a matter of policy, some of the premises are open to question.  :)

I have an easier solution, move out of over priced living areas like the Northeast (NJ, NY, CT) Boston, Seattle, LA & Orange County, CA

A $300K annually income makes you middle class in San Francisco, Los Angeles, New York and maybe even more so in Moscow, Paris, Geneva, London, Nairobi and many other cities.Assuming you should not buy a house that costs more than 3 times your yearly income, you would not even get a garage in NYC with that kind of revenue, and even less in Moscow. Any graduate from Stanford will easily make $150K per year before reaching 30 years old, same with his/her partner.

For big data practitioners in places where they can usually be found (NYC, SF), a $300k household income is by no mean spectacular.

Mirko,  Since we disagree on the premises, we obviously disagree on the conclusions:
1. You believe that the test of wealth is the ability to buy Bay area real estate--I do not.  

2. Anyone with a six-figure income in the US--anywhere in the US--is upper class by looking at their percentile in relative income, regardless of where they can afford to buy real estate.

3. Note that wealth and income are two different things:  if you wish to use wealth rather than income as your test, you would find my conclusion is still correct, but the figures are harder to obtain.

4. I also believe that argument is not enhanced by exaggeration involving the costs of garages in different cities.

5. http://www.deptofnumbers.com/asking-prices/      provides housing prices.  The median price of housing (condos and single-family) in SF is under $550,000, which we all know means half of the available housing is below that price, so buy a median-priced place and earn $180,000 annually.   Cheaper than divorce and far more romantic.

Rock on!!

Sam

The fallacy in your argument is that you put everybody in US in the same bucket (regardless of location), to assess whether you are upper class or not.

If I interpolate your reasoning, the top 1% earners in the world (including Africa and all the poorest countries) make $20,000 or more per year. By this metric, I'm sure that you are considered very wealthy and at the top of the upper class, by world standards.

Mirko, whether you are in the top 1% in the world or the top 10% in the US, it is still wealthy by any standard.  We like to believe in the US that everyone is middle class except Bill Gates and  Warren Buffett, but it just ain't so.   Statistically, anything about 90th percentile is not generally considered part of the middle range of the distribution.   Sam

I think the AMT issue is vastly exaggerated. First, if you really make tons of money, say above $500K, regular tax is worse than AMT, so you end up paying regular tax anyway. And if you make just one dollar over the threshold where AMT starts kicking in ($250K for a married couple?) then the AMT penalty will be very small, just a few cents more than regular tax schedule. In the worst case scenario, (maybe around $330K) you might have to pay another $7k of taxes over the regular tax schedule where you would pay $100k in taxes - that is, a 7% penalty.

In short, not worth the hassle of divorcing, even in the worst case. Plus, we are talking about civil divorce, not religious divorce (can you still be married in the eyes of God if you are civilly divorced?)

There were instances in the past though, where divorce made tons of sense. In Belgium a few decades ago, being married with a very high income would have resulted in 90% of your income going to taxes, while being divorced would make the 90% rate drops to 50%. It was a huge penalty that resulted in many artificial divorces among wealthy Belgians. It also created situations where earning more in gross income would end up earning less after taxes - a deterrent to make money! But the tax regulations were eventually changed, and it's not longer an issue.

For a more recent case where divorce could have made perfect sense, read this article published in The Economist, about Francois Hollande's 75% tax bracket in France, penalizing married couples. But it was rejected.

I haven't yet run the numbers, but I can't imagine that the extra tax burden on the spouse receiving alimony is going to be offset by the AMT impact.

 

Alimony is tax-deductible to the spouse paying it because - and only because - it's taxable to the spouse receiving it.

@Mike: yes the extra tax burden on the spouse receiving alimony is going to be offset, if it now puts both (divorced) spouses outside AMT.

What would kill the deal though is the attorney fees (for the divorce), offsetting tax gains, and the fact that the high earner is now stuck for ever paying a $150K alimony to his ex-wife. What if 5 years from now, one of the following happens:

  • True desire to divorce (and to pay $30k in alimony under a true divorce rather than $150k under a fake divorce!) but impossible to change the alimony terms...because you are already divorced! 
  • Your revenue grows, you are not anymore in the AMT window
  • Your revenue shrinks, you are not anymore in the AMT window

Reminds me a bit of the ploy to buy up all possible  lottery combinations when the prize reaches a certain threshold--a certain winner except that you might have to share the prize with others who chose the same winning numbers.   And, of course, as comedian Joe Wong has  pointed out, anyone contemplating marriage should consider this frightening statistic:   50% of all marriages last forever.

RSS

On Data Science Central

© 2019   AnalyticBridge.com is a subsidiary and dedicated channel of Data Science Central LLC   Powered by

Badges  |  Report an Issue  |  Privacy Policy  |  Terms of Service