Keeping family dynamics in check during a divorce can be challenging, especially after the recent tax changes.
One of the changes has had an impact on alimony payments, which have played a significant role in divorce for several decades. Under certain circumstances, alimony allowed splitting couples to shift taxable income from a higher-earning spouse to a lower-earning spouse. The result was that they could save money on their tax bill, leaving more income to split between couples.
Separations finalized before 2019 are still able to retain those same benefits. However, divorces that occurred after the Tax Cut and Jobs Act may not meet the same fate. While some may think this could be beneficial for them, that is unfortunately not the case. Even though divorced spouses owe less alimony, they may have to pay more in taxes, leaving both parties with less money to spend.
However, there are a few ways divorcing spouses can reduce their taxes.
Strategies separating couples can use
These are a few moves couples could make that may help them out:
- Transfer retirement accounts at pretax values: Depending on their age, assets and financial goals, it often makes sense for the lower-earning spouse to obtain the breadwinner’s retirement assets, including 401(k)s and IRAs to reduce alimony payments. By using this method, it could allow the higher-earning spouse to make alimony payments through their retirement funds and reduce what they owe in taxes.
- Be tactful about investments each spouse takes: If spouses have significant gains on stocks, mutual funds or real estate, they may want to consider a lump-sum transfer to counter alimony taxes. Spouses with no taxable income could sell their stock while the breadwinner with a six-figure salary may only have to pay a few thousand dollars on the sale.
- Utilize a Charitable Remainder Trust: This type of irrevocable trust can often help individuals set up and move one’s assets. A CRT can benefit spouses in a couple of ways as it can help them reduce their tax bill and give money to a cause they genuinely care about.
People deserve to keep more money in their pocket
Couples looking to divorce have varying circumstances, which can make separation proceedings challenging. That’s why couples looking to reduce alimony payments may want to seek legal counsel. An experienced and detail-oriented attorney can assist in evaluating their situation and possibly help them save money in the long-run.
