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Alimony may still be an option after the Tax Cut and Jobs Act

On Behalf of | May 29, 2018 | Alimony

Divorces finalized after the start of 2019 will see significant changes in the way the IRS looks at alimony. In the past, alimony was a tax-deductible expense for the payer and considered income for the recipient. Starting at the beginning of the year, divorcing spouses in Maryland may not get a tax advantage if they include alimony in their settlement agreements. Although it might initially seem that the tax code changes benefit spouses who receive alimony, this may not be the case.

Under the old rules, spouses often offered alimony in lieu of other assets. This might have enabled a higher-earning spouse to retain some of the property they wanted while providing a comparable amount in cash to their ex. Paying alimony sometimes even put a payer in a lower tax bracket. Now, divorcing spouses may need to get creative when drafting their settlement agreements. Fortunately, there are some options available that could give similar advantages to spouses who pay alimony.

Some innovative attorneys and their clients may utilize tax-advantaged retirement savings accounts to meet alimony obligations. People who pay alimony may be able to use the funds in retirement accounts to make lump sum payments or even monthly alimony payments. Because this money is not treated as compensation in the new tax rules, spousal support recipients will no longer be able to use alimony to fund their own retirement accounts. Lower-earning spouses may consider negotiating for other ways to get their portion of the marital estate.

These tax rules are relatively new, so attorneys continue to discover ways to make the most of the new law. Divorcing spouses who may be considering adding alimony to their settlement agreement should consider all of the options available to them. In some cases, alimony may not be the most effective way to receive funds from an ex-spouse.

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