You have heard of spouses getting married for financial reasons – but what about spouses getting divorced to save money? Although headlines are dominated by stories of people committing marriage fraud for various advantages, divorce can also be beneficial for certain individuals. In both cases, the romantic aspect of marriage is completely thrown aside in favor of a more logical, cold, and calculating approach. That being said, financial pressures are high in the current economic climate, and spouses are looking for any possible way to save money. But how can divorce be financially beneficial?
Strategic Divorces Explained
Strategic divorces often involve spouses ending their marriage in order to take advantage of certain tax benefits. But what exactly are these benefits? Part of the discussion revolves around the Tax Cuts and Jobs Act of 2018, which included a so-called “marriage penalty.” This involved couples being liable for a higher tax penalty – especially those with higher incomes. If these individuals have joint incomes of about $612,000, a 37% tax bracket applies.
Some immediately came to the conclusion that it was more financially beneficial to be single. This leads to situations where individuals are still technically in a relationship, but they decide to divorce “on paper” in order to save money on taxes each year. For those who are unconcerned about the religious or traditional aspects of marriage, this might seem like a no-brainer. For financially-conscious individuals, achieving a lower tax bracket is worth even the most extreme actions – including ending a perfectly good marriage.
Another potential benefit of strategic divorce involves Medicaid. Spouses may choose to divorce in order to make nursing homes more affordable, especially if one spouse has too many assets to qualify. The alternative could be a slow, financially-ruinous draining of their assets and their retirement funds. So why not simply divorce and have the government pay the bill? This is certainly what many spouses have thought about over the years.
Another popular reason for strategic divorce involves financial aid for children. In theory, it would make sense for parents to divorce before applying for a Free Application for Federal Student Aid. This is because the custodial parent’s income is analyzed to determine whether the child qualifies. If one spouse walks away from the marriage with few assets after a divorce, this directly benefits the child and the affordability of their education.
The Negative Aspects of Strategic Divorces
So if strategic divorces are so beneficial, then why aren’t more people doing it? The truth is that this strategy can be extremely risky, and it may end up backfiring in spouses’ faces. Spouses may immediately sacrifice their retirement benefits upon divorce, and dividing pensions can be tricky. It may also be disadvantageous in terms of IRA contributions.
Even if spouses agree that the divorce is simply strategic and that the relationship itself is still solid, it may lead to serious power imbalances between them. One spouse might end up having complete control of most assets – including a family business. This means that trust is essential if spouses want to engage in this highly risky maneuver – and you never know what the future may bring.