In case you didn’t hear about it, 2019 marked a big change in how to report spousal support, or alimony, at tax time. Before, those paying the support could list it as a deduction on their taxes, while the people receiving it had to pay taxes on the amount. Most experts said this actually worked in favor of both spouses, since it lowered the total taxes paid.
At the start of 2019, that all changed at the federal level. Payors cannot deduct their spousal support from their taxes, and recipients do not have to pay tax on the income. California’s state taxes still follow the old rules, but the new laws still have a significant impact on families. Fortunately, experts have suggestions for those who want to save money and reduce their tax burden this year if they plan to divorce.
One of the most effective strategies depends on your investments. Dividing them in a certain way could reduce the taxes both of you pay on them. If the gains on the investments are high, one spouse can transfer a lump sum to the other. For instance, if you have no taxable income, you can sell stock without paying tax, but your higher-earning spouse would pay. The higher-earning spouse can even purchase more stock with the money he or she might have paid to spousal support.
If you earn less than your spouse, you can take more retirement assets in your divorce settlement instead of a higher rate of spousal support. Your spouse allocates money that he or she would use for alimony to a retirement account instead. That money isn’t taxed the way that spousal support is. You will pay taxes on the amount when you use it, but you’ll have more money overall. Furthermore, even if your spouse dies, you will still get that money, which is not the case with alimony.
Charitable Remainder Trust
Another way to reduce your tax burden is by using a Charitable Remainder Trust. It’s an irrevocable trust, meaning that the terms of the trust can’t be easily changed. The trust pays income to the beneficiary determined by the creator. The income is taxable, but spouses can work together to ease their overall taxes. After a designated period of payment, the remaining money in the trust goes to a charity chosen by the creator of the trust.
Advantages and disadvantages
Some of these options may be particularly attractive if you and your spouse have a contentious divorce. Continued spousal support payments may keep tensions going between the parties, but other options allow spouses to simply move on and have less interaction. One disadvantage, however, is that if the paying spouse goes into bankruptcy, payments relating to division of property may be eliminated but that is not the case with spousal support.
Whatever option you and your spouse choose, the most important thing is that you both have the ability move on with your lives. Depending on what both of your future plans may be, paying less spousal support might make sense as part of your divorce agreement. The best thing is to consult financial and legal professionals to determine the most beneficial course of action.