Because you and your current spouse completed your divorce after 2018, you must understand how current tax laws affect your alimony payment. Payors no longer deduct tax payments, and recipients no longer pay taxes on payments.
Forbes offers tips for minimizing your taxes without the alimony deduction. Understand how to meet your obligations without going broke.
Shift retirement accounts
In exchange for lower alimony payments, the lower-earning spouse may accept more of a 401(k), IRA or another retirement asset. Higher-earning spouses use those assets to pay alimony. Spouses paying alimony fund all or a portion of their payments by shifting funds without incurring taxes. The receiving spouse absorbs taxes for withdrawing from the retirement account, but he or she enjoys greater agency and more assets to tap for income. No matter the outcome, the receiving spouse owns the assets.
Charitable remainder trust
The spouse who pays alimony may establish a charitable remainder trust to fund a percentage of alimony payments. This option gives the higher-earning spouse a deduction based on the contributed asset value. Another benefit of this option is a spouse may fund the charitable remainder trust with low basis investments. After appreciated assets transfer to the trust, a spouse may sell or diversify them without worrying about paying taxes on gains. Spouses need not worry about feeling trapped with a low basis investment.
You should not have to worry about how meeting your divorce agreement costs you more in taxes. Learning the latest tax laws and viable options, no matter if you receive or pay alimony, helps you create a post-divorce financial strategy.
