Under the 2018 Tax Cuts and Jobs Act (TCJA), any divorce finalized after January 1, 2019 will not allow for the deduction of spousal support, also commonly known as ‘alimony’. Because of the looming changes in the law, there has been a rush to the court-house to accelerate divorces in places like California and New York. New Mexico does not keep updates stats on the numbers of divorces filed, but one local Albuquerque divorce attorney for wealthy clients has noted a recent increase in business.
Often the amount of spousal support can be substantial, particularly after a long marriage or one party earns significantly more than the other. The IRS estimates that about 600,000 individuals, or 20% of the divorces per year receive spousal support after a divorce. According to the Leimberg newsletter, it tends to be the “richer” Americans who deduct alimony and the loss of this deduction will result in those alimony payers paying up to 37% on those alimony payments, as opposed to the recipient spouses who are often in a lower marginal income tax bracket. The net effect of the loss of the tax deduction is significant. The Joint Committee on Taxation estimates elimination of the tax break will increase federal revenues by $7 billion over 10 years.
Divorcing after January 1, 2019 means that judges will most likely start awarding smaller payments as the lost tax deduction shrinks what the higher earner can afford. But working with your estate and tax professionals may also result in work-arounds to the 2018 Tax Cuts and Jobs Act (TCJA). Foregone alimony that would have been paid had it been deductible could be made up with other assets such as a property settlement, with low basis assets like real estate. The ex-spouse who receives the real estate in the divorce settlement needs to liquidate it, the ex-spouse will get the associated tax hit with the sale – at the lower tax rate.
Getting a larger share of tax-deferred retirement accounts is another option. A Qualified Domestic Relations Order (QDRO) that sets up future payments to a lower-earning spouse from a higher-earning spouse’s retirement account would be taxed at the lower earner’s rate when distributions start. Shifting more retirement assets to one spouse over the other spouse also shifts the tax burden with those accounts, which could help alleviate the lost alimony deduction. A Charitable Remainder Trust (CRT) could be another option. The bread-winner spouse could agree to establish a CRT with the non-bread-winner spouse as the income beneficiary of the CRT. That way the bread-winner spouse can get a charitable income tax deduction for funding the CRT and the CRT distributions would be income taxable to the non-bread-winner spouse.
Working with a team of professionals including an Estate Planning attorney, clients who will not be able to complete their divorces before year-end can establish property settlements, shifting qualified retirement accounts under QDROs, and CRTs as possible work-arounds. If you find yourself in this situation, please feel free to call us today at the Foster Legal Advisory Group, 505-835-6580, today.
Sources:
Estate Planning Newsletter #2664 (September 17, 2018) at http://www.leimbergservices.com, Copyright 2018 Leimberg Information Services, Inc.
Tax Law Prompting Flood of Accelerated Divorces As A Dec. 31 Deadline Looms, Paul Caron, LA Times, Wednesday, September 26, 2018