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Maximizing tax savings for divorcing couples

As a result of the Tax Cuts and Jobs Act, alimony for future Texas divorcees will no longer be treated as a tax deduction. The rule will apply for future separation agreements starting in 2019. This historic change reverses the legislation enacted in 1942 that permitted tax deductions for alimony and ongoing spousal financial support.

Couples in Texas and throughout the U.S. with agreements put in place prior to 2019 won't be affected by the recent change in legislation. All divorce agreements drafted before 2019 will still be treated as tax deductible for reporting purposes.

For future divorcees, however, the tax change could reduce the overall available income. Capitalizing off of any deduction for the purpose of alimony requires that the alimony be paid in actual money, not in nondeductible alimony like property. To leverage potential tax benefits, those required to pay alimony can transfer their account balances through a strategic property settlement, which isn't tax deductible, as a part of divorce negotiations. When money is transferred to IRAs using pre-tax dollars, a tax deduction can be created. The value of the recipient's retirement savings account will then be increased. If there are no withdrawals made before retirement age, the recipient avoids tax penalties.

Although receiving alimony tax-free can be perceived as being financially advantageous, this is not always the case. When the after-tax income available is reduced, the alimony paid will be dramatically reduced due to lack of available funds.

Tax-deferred IRAs and 401K funds may provide an advantage for both parties during divorce negotiations. The former spouse requesting spousal support for living expenses may benefit from alternative arrangements that create additional options for the provision of financial support. When in the midst of divorce negotiations, creatively seeking out tax savings opportunities can be explored with the assistance of a divorce attorney.

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