Before the Tax Cuts and Jobs Act, we often counseled clients about the tax benefits of alimony. However, as of Jan. 1, 2019, the landscape changed.
Forbes notes that now, the spouse who receives alimony does not report it as taxable income, and the payor does not deduct it. As a result, the payor typically owes more taxes and consequently pays less alimony, while the recipient does not have to pay taxes on the money, but receives much less.
There may be ways to compensate for this change through property division so that you and your spouse both still benefit.
Retirement account transfers
The lower income spouse may want to agree to accept retirement assets during the property division stage of the divorce. The higher income spouse may agree to continue to contribute tax-free dollars to the account in lieu of making a direct payment to the other spouse. Depending on the plan, there may be early withdrawal penalties and other factors, so it is important to explore all the nuances of this option before agreeing to it.
Charitable remainder trust
The higher earning spouse could set up a CRT and name the other spouse as beneficiary to receive monthly payments throughout his or her lifetime, or through a specified time. When the beneficiary dies or the trust ends, the assets then transfer to the charity designated by the trustor.
Property division settlement
During the property division phase, you and your spouse could assess how much alimony may be fair based on factors the judge would typically consider, and then divide assets in a way that offsets that amount. This may still have tax consequences, so you should make sure these do not upset the balance of the trade-off.
For more information about property division, alimony and other divorce matters, please visit our webpage.