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Retirement accounts may be only way to avoid 2019 alimony taxes

On Behalf of | Jul 5, 2018 | High Asset Divorce |

Divorces can often drag out over a long period of time, but high asset individuals may want to take steps to finalize their agreements sooner than later. Under new tax laws, people who divorce after Dec. 31, 2018 will no longer be able to deduct alimony payments unless they use retirement accounts to transfer funds. Trying to get ahead of this change may be best for many individuals in Texas, especially those with a high net worth.

Historically, Americans paying alimony have been able to deduct these payments from their taxes. Approximately 600,000 payer spouses use this deduction each year. There is no limitation on the amount that can be deducted, which is critical to the 20 percent of alimony payers who are in the top 5 percent of household income earners.

This tax law change will mean that income for formerly married couples will most often be taxed at the rate of the highest income earner, as opposed to the lower earning alimony recipient. The Joint Committee on Taxation estimates that eliminating this tax break will increase federal revenues by $7 billion over the next 10 years. However, those who are divorced prior to the law changing in 2019 will still be able to utilize the tax break.

For some divorcing couples in Texas, the alimony tax deduction is a major bargaining chip in spousal support discussions. Many different issues are easier to address, and tensions over alimony are eased. Following the law change, one of the only ways to make the recipient responsible for taxes on alimony would be to pass on assets in the form of tax-exempt retirement accounts. Those looking to get a divorce prior to the law change, or those with questions about how things will differ in 2019, should speak with a lawyer in the state.