Medical Expenses Penalty.
You already know that unless you are nearly dying, without insurance coverage, there is no medical deduction. It infuriates you that you've spent over $8,000 in deductibles and 20% co-pays and for that valuable insurance coverage, but you can't deduct a cent! Well, the bad news is: even if you get divorced, $8,000 in medical expenses won't save you enough to make it worthwhile - not even at incomes as low as $25,000 each.

As you get older or seriously ill and find that out-of-pocket medical care is much more costly that $8,000, it may be worthwhile to review the tax consequences of being single. Remember, paying for care providers in the home, as well as living in certain senior care residences, are medical expenses. One gentleman on dialysis saved over $15,000 of taxes in one year by using his medical expenses to shelter a $50,000 IRA withdrawal ... but that's another topic.

Basically, 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 other advantages to being single — Medicare, state aid, and so forth ...

Speaking of Seniors ... let's talk about Social Security. You know that Social Security isn't taxable as a long as your income is under $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 SS income was only around $1,000 per month.

As income rises, more issues come into play. 

The Tax Rate Penalty for couples has not disappeared. When a couple's income gets to $102,300 they enter the 31% tax bracket. But two single people can earn $61,400 each before they reach 31%. That $20,500 difference means a savings of about $600.

The difference increases dramatically when you get to the 36% bracket. A couple can earn up to $155,950 before reaching that level. While two singles can earn as much as $256,200 at 31%. This difference can cost over $5,000 by being married.

Interestingly enough, when you look at the top tax bracket of 39.6%, a married couple reaches it at the same income level as a single person - $278,450. (Remember, you can generously pay as much alimony as is reasonable to balance out the two incomes and lifestyles ...) So, a couple with over half a million dollars in income would save over $23,000 in federal taxes alone by splitting up.

Back to earth! The deduction for Real Estate Rental losses is up to $25,000 (provided you meet lots of stringent requirements and rules). Unfortunately, as your income rises over $100,000, your ability to deduct the losses declines. The deduction disappears when your income reaches $150,000. For married, filing separately, you lose the whole $25,000 deduction, unless you are truly separated and living apart.

But, if you divorce and file as two single people, you get two benefits

1) Your income decreases, so at least one of you can take full advantage of the $25,000 rental deduction. (If you split the property properly during the divorce.)

2) If the loss is more than $25,000, by being separate individuals, you can each take up to $25,000 worth of the losses. This split could save as much as $15,000 in federal taxes for folks in the 31% bracket.


That $250,000 per person capital gains exclusion on the sale of a personal residence is quite interesting. But it only applies to one residence every two years. For people who are really good at turning a profit on real estate or real estate fixer-uppers, it may be interesting to be able to turn over a house every year. By being single, you could each claim a separate house as a residence and save over $50,000 each year. (Each one sells a house in alternate years.) I know, you think it's ridiculous to expect to make such large profits in today's real estate market. But, if you look at the higher end homes - $2,000,000 or so, getting a 10% profit for fixing up a home is not unreasonable. Not paying any taxes on the profits gives you full use of your capital to buy new properties each year and increase your profits. (Get a real estate license and become your own Realtor and you save even more!)

Isn't it worth thinking about? 

There's more. Much more, but these are the highlights. 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 — or cancel that wedding and throw a cohabiting party!

Dedicated to Marilyn Monroe and all the ladies smart enough to marry for both love and money!

Links:
How to Marry a Millionaire (1953) - Review

How to Marry a Millionaire (1953)

Marilyn Monroe Seekers

Divorce Magazine: 
More information about dealing with divorce