There is no longer an alimony deduction for divorced spouses filing their taxes. This may be changing the way divorcing couples are handling alimony, according to an article in Forbes.
Prior to this year, alimony payments were something that the payor could deduct, and the recipient was taxed. “This allowed divorcing couples to shift taxable income from the breadwinning spouse in a high tax bracket to the spouse earning less in a lower tax bracket,” according to the article. Now, if the subject order was entered after December 31, 2018, the paying spouse is unable to deduct his or her alimony payments from income.
The article shared strategies that can be used to gain similar tax benefits to the former alimony deduction. These strategies work when there is a differential in tax brackets between divorcing spouses, but not when the couple is in the same high tax bracket.
- The spouse receiving alimony agrees to lower payments in exchange for more of the retirement assets. By transferring funds in an IRA or 401(k), the higher income spouse is not taxed. Note that in this scenario, there is a 10 percent penalty for the receiving spouse to withdraw funds from a retirement account before age 59.5.
- The alimony payor may set up a Charitable Remainder Trust (CRT) to benefit a cause. As part of the arrangement, the CRT pays taxable income to the ex-spouse for a specified period of time. This income serves as alimony but is not characterized as such.
- If one spouse has large gains on stocks, mutual funds or real estate, he/she may wish to transfer these assets to the spouse in the lower income bracket. This could avoid a substantial tax, and the lump sum transfer could be made in lieu of alimony.
If you would like to discuss how provisions in your divorce agreement will impact taxes, an experienced Bucks County divorce attorney can help. Call us at 215-340-2207, or email firstname.lastname@example.org.