The GOP's Tax Cuts and Jobs Acts (TCJA) will make some significant differences for families in 2019. It especially affects those negotiating alimony and support payments as a result of a pending divorce.
How will new tax laws affect a lump sum settlement or a spouse's decision to pay alimony?
In an effort to raise an anticipated $6.9 billion for the government over the next 10 years, the tax laws have changed regarding alimony and support payments specified in a divorce settlement. The laws may affect your decision to opt for a one-time payout or decide against it. A lump sum settlement in lieu of periodic monthly payments will no longer qualify for a deduction for the paying spouse nor will it be a tax liability for the dependent spouse. This may cause a paying spouse to negotiate a lower settlement since the payout will not shelter his/her income.
It is important to understand the tax laws and your liability as a result of any decisions you make regarding your settlement. Consult a tax attorney or tax advisor who can explain the specifics of current tax laws as they relate specifically to your situation.
Below are some tax basics that you should consider under the new law:
1. Alimony is no longer tax deductible for the payor and alimony received is no longer taxable income. This means that those usually designated to pay support payments as of 2019, could be advised of the tax liability and may consider negotiating a smaller amount of support since it's no longer a deduction.
2. As of 2017, the tax law eliminated a $4,050 exemption for each dependent through 2025. The child tax credit has doubled from $1,000 to $2,000. While the law has significantly affected the exemptions for dependents, single tax payor deductions have improved from a $6,350 standard deduction in 2017 to a $12,000 deduction on 2019 taxes.
3. Higher income spouses may elect to give the lower income spouse an IRA as a settlement in lieu of alimony payments to avoid the tax burden. The lower income spouse would assume the tax liability of the IRA when it is assessed, but at a lower percentage based on his/her tax bracket.
4. Pre- or post-nuptial agreements may need to be reviewed by an attorney, financial advisor and/or tax professional to consider the changes in the law that affect tax liability to either spouse.
5. Do not get your lump sum buyout for support or alimony confused with a lump sum buyout for equalization of marital property. The tax implications are different and you should consult your attorney or accountant for more information.
6. Since the law is new, many attorneys and financial professionals will spend 2019 discovering the best opportunities to provide their clients advice or answers regarding their settlements and support payments. In a perfect world: It would be best to avoid filing for divorce this year (2019) to give these representatives the chance to find any possible alternatives to ensure their clients the greatest success in their divorce settlements.
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