Avoiding Alimony Taxation After a Divorce in the New Year

For anyone who will be getting divorced in 2019 and likely will be paying alimony, the prospect of facing the tax changes to alimony brought about by the Tax Cuts and Jobs Act (TCJA) can be daunting. In high-asset divorces in particular, the TCJA federal tax law changes could result in tens of thousands of additional dollars in federal taxes for the party who pays alimony in the New Year. Some states like Illinois have changed the way that spousal maintenance or alimony gets calculated to account for the federal tax law changes, but Michigan has yet to do the same. However, there may be ways for high net worth individuals to avoid the substantial taxes that will be associated with paying alimony in the New Year.

According to a recent article in Investment News, the party paying alimony may be able to use IRAs, 401(k) accounts, or other investments to make lump-sum alimony payments that will not draw the same federal tax. What do Michigan residents who are planning for divorce in the New Year need to know about avoiding alimony taxation?

Federal Tax Law Changes Will Alter Alimony Taxation Methods

As you likely know at this point, the TCJA changes concerning federal taxation of alimony will take effect for couples who finalize their divorces on or after January 1, 2019. According to a recent article in the Detroit Free Press, the new federal tax law has some Michigan couples “rushing” to finalize their divorces before the New Year so that they will not be affected by the tax law changes. Given the rising rate of people attempting to finalize their divorces before being impacted by the TCJA changes, commentators are referring to the process of “tax-conscious uncoupling,” or married couples who are planning the timing of their divorce around the TCJA timetable.

Under the TCJA, any divorces finalized before the start of 2019 will result in the spouse paying alimony getting to deduct that amount from income before calculating taxes, while the spouse receiving alimony will pay taxes on it as if it were income. Divorces finalized in 2019 will see the paying spouse paying taxes on alimony while the receiving spouse will not be taxed on any alimony received.

Ways to Avoid the Tax Changes and Implications

For Michigan couples who will need to finalize their divorces in 2019, there may be other ways to fulfill alimony or spousal maintenance obligations without being taxed on the alimony payments. The article in Investment News discusses the possibility of paying alimony in other forms, such as through property. The article suggests that married couples who are finalizing their divorces in 2019, especially high net worth couples, should consider the possibility of a lump-sum spousal support payment that comes from real estate. At the same time, real property is not the only way to provide spousal support that is not taxed as income.

A spouse that earns a substantial income each year and is required to pay alimony should consider the possibility of a lump-sum payment through funds transferred from an IRA or a 401(k) through a qualified domestic relations order (QDRO). A QDRO at the time of a divorce can allow a spouse to take money out of a tax-deferred retirement savings account without paying the penalty, and it can place the tax burden for the payment on your spouse.

Contact a Divorce Attorney in Michigan

To negotiate this kind of lump-sum payment for spousal support, you will need to work with an experienced Michigan divorce attorney who can negotiate a property settlement that is satisfactory to both parties. Contact the Law Offices of Michael A. Robbins to learn more about divorce, alimony, and tax options in Michigan.