As any recent divorcee in Connecticut will testify, an integral part of the separation proceedings is figuring out the size and conditions of alimony payments. This is all the more pertinent thanks to the fact that alimony payments are governed by ever-changing laws.
An excellent case in point is how the introduction of The Tax Cuts and Jobs Act in early 2017 has affected couples about to dissolve their marriages. While paid alimony used to be tax deductible and alimony received was considered as taxable income, the situation has been reversed for all new divorces starting in 2019. Although this may seem like a more favorable arrangement for the recipient, the fact of the matter is that by taking a chunk out of after-tax income, the IRS could leave less money for the couple to split.
Nevertheless, the new law also presents couples with an opportunity to better plan their alimony settlements. The party paying alimony can transfer balances that are tax-favored to the recipient. On the one hand, this will reduce the amount of money taken by the IRS. In addition, the parties both gain from having more to divide. Tax-favored balances include pretax retirement savings, such as traditional IRAs and 401(k)s, which can be transferred as either a form of property settlement or as direct alimony.
Considering complex changes of the new law, soon-to-be exes may need financial and legal assistance during the divorce process. For example, a lawyer could help a client fight to obtain a fair alimony settlement. An attorney could also help make sure the child support amount is adequate.
