Arizona couples who divorce in 2019 or later will be operating under new tax rules when it comes to alimony. Under the Tax Cuts and Jobs Acts of 2017, alimony that is paid as part of a divorce agreement will no longer be tax deductible. Meanwhile, alimony payments will no longer be considered taxable income. This is the exact opposite of the way alimony has been taxed for the past 76 years.
At first glance, this may appear to be a great deal for alimony recipients, but it should be pointed out that a spouse with reduced after-tax income will have less money available to pay alimony. This could offset any tax savings by the recipient. However, financial experts say the new tax law can be used to help both parties in certain situations.
For example, tax-deferred retirement savings will have increased value under the new law. Under the old rule, spouses making alimony payments wanted them to be tax-deductible, meaning they had to pay what was owed in money. Now that alimony payments are no longer tax-deductible, other forms of payment are more attractive. For instance, a spouse could meet their alimony obligation with real estate. He or she could also offer a lump-sum payment in the form of stock shares or retirement plan funds from a 401(k).
The new alimony tax rules are complex. In order to fully understand how they may impact a divorce settlement, it may be beneficial to speak with a family law attorney. Legal counsel may represent a client’s interests throughout the divorce process and work to negotiate fair agreements on alimony, child custody, child support, asset division and other important divorce legal agreements. If a divorce agreement needs to be modified, an attorney may file the necessary legal documents in court.
Source: Investment News, “Divorce 2019: How to use IRAs and 401(k)s to ease future alimony planning,” Ed Slott, May 11, 2018