Tax-saving opportunities may still be available under The Tax Cuts and Jobs Act. Couples who are negotiating an alimony agreement as part of their divorce may consider having pretax retirement savings transferred instead. Transfers can be through property division, lump-sum payment, IRAs and 401(k) plans. In California and other states, couples may find more creative tax-saving ways to pay alimony.
Under the new bill that begins in 2019, money paid as alimony will not be tax deductible to the payor but will be tax-free to recipients. This new bill reverses the law that has been in place since 1942, but existing agreements will not be affected by the new ruling. Nondeductible alimony can be paid with stock shares, real estate or retirement plan transfers and, sometimes, depending on state laws, balances from individual retirement accounts.
Property settlements or a lump-sum payout instead of standard alimony payments are not taxable to the recipient. Transfers from IRAs and other pretax savings plans will allow for withdrawals to be made at a lower tax rate until age 59 ½. The result could be a win-win for both parties.
For divorces occurring after 2018, new tax rules will be in place. Couples may have less after-tax income for alimony, and the amount the IRS can take will increase. In California and elsewhere, couples are finding more creative ways for both sides to profit. For those considering a divorce in 2019, they may benefit from consulting with an attorney to discuss the options available to them regarding the new tax laws.
Source: investmentnews.com, "Divorce 2019: How to use IRAs and 401(k)s to ease future alimony planning", Ed Slott, May 11, 2018