Strategies for Reducing Taxes in Divorce Now That the Alimony Deduction is Gone
Prior to 2019, federal law allowed a divorced spouse to make tax-deductible alimony payments to the other spouse, who would then pay taxes on this source of income. In many cases, this provided an incentive for the higher-earning spouse to make fair and generous spousal support payments to the lower-earning spouse after a divorce. However, the Tax Cuts and Jobs Act, approved by Congress in 2018, changed this dynamic; as of January 2019, alimony payments are no longer deductible to the payor, nor are they taxable to the recipient. So, how is this change impacting couples who finalize their divorces after December 31, 2018? It seems that both spouses are finding themselves with less post-tax money, according to Forbes. If you think a divorce may be on the horizon, it’s worth taking a look at some ways to minimize your taxes under the new law.
Dividing Assets Wisely
One major aspect of the divorce process is the division of your assets. While many people assume that an even fifty-fifty split is considered an equitable division, if there is a large income discrepancy between the spouses, such a division may not end up being as fair as it seems. As the alimony deduction is no longer in place, it’s advisable for couples to carefully consider putting some strategies in place that will protect their monetary assets.
Key Strategies to Consider
One option to think about is for the lower-earning spouse to agree to receiving retirement assets (i.e., IRAs or 401(k)s) instead of traditional alimony payments. Essentially, the higher-earning spouse would make these spousal support payments, but they would be in the form of a retirement asset instead. This would allow the payor to make these payments using pre-tax dollars, which mirrors the benefits of the alimony tax deduction that is now defunct. The recipient must still pay taxes when they withdraw money from the retirement accounts, but they still retain control over these assets.
Another idea to consider is using a Charitable Remainder Trust (CRT) to partially fund alimony payments. The payor can set up and fund the CRT to ultimately make a sizable contribution to a charitable cause, but the trust will also pay taxable income to a designated beneficiary for a set amount of time (the remaining balance in the trust will then be dispersed to the assigned charity). The higher-earning spouse can set up the CRT by naming the lower-earning spouse as the trust’s beneficiary while also fulfilling any philanthropic pursuit they wish.
Pay Attention to Investments
Another alternative to alimony payments is for the high-earning spouse to transfer a lump sum from the couple’s large investment portfolio to the lower-earning spouse. Instead of making scheduled spousal support payments, this lump sum could provide a more stable source of financial support to the lower-earning spouse, and the higher-earning spouse can then use the money they would have spent on alimony payments to purchase more stock in order to reload the portfolio. Additionally, this one-time transfer allows for a cleaner break, as the lower-earning spouse has no need to rely on monthly alimony payments from the payor.
Want to learn more about how the change in alimony deduction law may impact your divorce? Contact the knowledgeable legal team at Lee Tyler Family Law, P.C. today at (503) 233-8868. We are here to answer your questions and offer you the guidance you need.