How Can Alimony Affect Your Taxes After a High-Asset Divorce?
Most newly divorced couples are forced to embrace several financial changes after their agreement is finalized, including the potential impact of alimony, or spousal support. Alimony refers to the payment one spouse makes to another after their marriage is dissolved, whether that payment is temporary, long-term, or a lump-sum. Negotiating the terms of alimony payments can be one of the trickiest aspects of any divorce, but it can be particularly challenging if the couple has a substantial amount of assets.
When couples have a high number of assets or funds, they have more ground to cover, which can lead to longer negotiations, additional fees, and, ultimately, higher alimony payments. Due to the new tax code in America, both payees and recipients will notice substantial changes to the way in which alimony payments are taxed.
With so much at stake, it’s extremely important to determine how your alimony agreement could affect your taxes. Whether you’re the payee or the recipient, if you have an alimony agreement with your ex-spouse, you must do your due diligence to determine how your new arrangement could affect your financial future.
The New Tax Code
Starting with couples who filed for divorce after January 1, 2019, the U.S. tax code changed the ways in which spouses pay taxes on alimony payments. In the past, the paying spouse was able to deduct from their payments, and the receiving spouse had to claim the alimony they received as taxable income.
The new code, however, eliminates the deduction and no longer requires recipients to claim their alimony as taxable income. Instead, those paying alimony may be subject to much higher payments overall and receiving spouses can retain their alimony, tax-free.
Although this new law can be beneficial for some, it also takes away a very valuable negotiating tool for those trying to come to an agreement about their alimony arrangement. Without the incentive of a tax break, more and more couples are forced to make allowances for the long-term repercussions of this new tax code. Luckily, there may be other options.
Planning for Alimony Through a Trust
For some couples, especially those with a high number of assets, it may be more beneficial to plan ahead by moving alimony payments into a trust. Using a grantor trust to preserve the alimony payments can help ensure the recipient still receives the payments they need without costing the paying spouse anything additional. The receiving spouse would be responsible for paying taxes on any of the trust’s distribution, but both parties can plan ahead in anticipation of what those fees would include. Plus, the trust’s payments could continue after the payor’s death, which can’t be said for standard alimony payments.
However, some say that this method may cause more scrutiny from the IRS, so it’s best to discuss this option with your attorney and financial advisor.
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If you’re going through a high-asset divorce, make sure you know how your alimony arrangement could impact your financial situation later on down the road. Whether you’re the paying spouse or the recipient, your alimony arrangement could have a significant impact on your claimable tax breaks, tax returns, and your take-home income.
To learn more about the new tax code and how it could impact your alimony in a high-asset divorce, contact our attorneys at Hendershot, Cannon & Hisey, P.C. and discuss the details of your case with our experienced legal team. We have ample experience representing the interests of high-asset individuals filing for divorce or alimony modifications, and we can help you find the best legal solution.
Contact Hendershot, Cannon & Hisey, P.C.today to discuss your case with our firm.