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A new tax strategy for alimony in a high-asset divorce

On Behalf of | Oct 15, 2019 | High Asset Divorce

The overhaul of the U.S. tax code brought a radical change for many Americans, especially those who filed for divorce after Jan. 1. One of the most significant changes is how alimony is taxed. The new law no longer allows the paying spouse to deduct the payments, while the receiving spouse does not have to claim it as income.

Divorce can be a harsh emotional experience for a family, especially when it gets down to the basics. When couples split, their main concerns are their assets, child support and parenting time with their children.

The new tax code has a significant impact

Prior to 2019, a spouse earning $300,000 and paying a third of that in alimony could deduct the full $100,000 and still have an income of around $157,000 after taxes. However, under the new tax code, the paying spouse’s income is nearly $35,000 less.

The receiving spouse would have paid more than $15,000 in taxes before 2019. Now, they get to keep the entire $100,000 tax-free. As a result, alimony negotiations are more complicated as the alimony deduction played a huge factor in reaching settlements.

Dealing with tax consequences

The financial effects of the new tax code can be complex and create more anger during divorce negotiations. However, a new strategy is emerging as some high-asset couples are moving alimony payments into a trust.

Financial experts say grantor trusts ensure payments continue even after the payer’s death, where alimony would stop. However, the receiving spouse is responsible for taxes on any distribution, and some accountants warn this method may receive more scrutiny from the IRS.

Seek compassionate legal advice

Texas is a community property state, meaning all marital assets are divided equally. Adding alimony and child support considerations can complicate a divorce, especially for high-asset families. The tax consequences over alimony payments can make the process even more contentious. An experienced family law attorney here in Texas will protect your interests and fight for you in court.