How to Make Alimony Tax-Friendly

With the Tax Cut and Jobs Act (TCJA) in place, it’s out with old and in with new when it comes to alimony. For years, the spouse paying alimony could deduct those payments from his or her income. On the other hand, the spouse receiving the alimony payments had to pay a 15 percent tax. With the TCJA now in place that policy has been turned upside down.

Under the new law, starting in January of 2019, the spouse who pays alimony can’t deduct it from his or her income. And the spouse receiving the payment does not have to pay taxes on it. The new law will not affect existing divorce and separation agreements. But for future divorce agreements, that’s a significant difference. It could also mean other sources of income could play a more prominent role in divorce discussions.

For example, IRAs could give couples an alimony planning opportunity under the right conditions. Starting in 2019, the paying spouse could give the receiver a lump-sum alimony payment in the form of an IRA. Transferring the account is tax-free.

This would allow the paying spouse to rid his or herself of an account with income taxes if they withdrew money from it. Therefore, it works like a deduction because the giver no longer has to pay taxes on that money.

In addition, the receiver also has to pay taxes when he or she takes a distribution from the account. However, this will not work for couples that need alimony immediately. But it could be a great strategy for older couples that divorce that can wait for a payout.

 

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