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This tax planning strategy could help with spousal support

You likely noticed how difficult tax season was this year. News update after update discussed unforeseen problems and unexpected tax obligations. The reason for the surprises: a new tax law.

The Tax Cuts and Jobs Act (TCJA) went into effect on the 2018 tax returns. As a result, many taxpayers were scrambling to make sure their tax returns were in line with the new law.

We will learn from this first tax season under the new law. We will make changes so we do not make the same mistakes and figure out how to make the tax law work in our favor. One specific area that can benefit from this knowledge is divorce.

Divorce involves a transfer of assets. The couple will now split assets once deemed marital. This process can result in tax consequences.

Arguably, the biggest impact of the TCJA when it comes to divorce were the changes made to alimony. As discussed in more detail here, the law basically took away the paying party’s tax advantages when paying spousal support. One potential option to still get some tax advantages while paying spousal support involves use of a trust. A trust is a legal tool funded by the creator that would then make payments to a listed beneficiary. This document could be drafted to pay the recipient without the tax burden.

A word of caution: as noted in a recent report by the New York Times the Internal Revenue Service (IRS) may frown upon the use of a trust in this manner. There is concern the agency will deem the trust as “disguised alimony.” As such, it is wise to discuss this and other options with an experienced attorney before finalizing your divorce.

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