Tax deduction laws for alimony payments have changed and will affect recipients and payers in different ways. Couples in New Jersey will have to explore different avenues to seek out tax savings. The Tax Cuts and Jobs Act reverses a law enacted in 1942, and one of the expected outcomes is a shift in how alimony payments are treated during the negotiations process.
The Tax Cuts and Jobs Act won’t permit tax deductions for alimony. Agreements finalized prior to 2019 won’t be affected by the change, so any alimony paid in money will be eligible for tax deductions. Those required to pay alimony can have money transferred between IRAs and 401Ks. If money is transferred with pre-tax dollars, a deduction can be possible. The recipient avoids tax penalties in avoiding early withdrawals while increasing the overall value of the retirement savings funds. The payer has the ability to reduce their taxable income in transferring funds using pre-tax dollars.
The new tax rule affects the transfer of assets between parties during divorce negotiations. Properties transferred are not tax deductible, so the use of IRAs and 401Ks in divorce negotiations can be potentially beneficial to both parties involved. The new rule increases retirement savings for the recipient and potential earnings over time on investments. The new rule also lowers after-tax income available. Tax-deferred savings receive a boost for retirement accounts when transfers are used.
Individuals who are going through divorce must be sure to explore opportunities for tax savings. Since recent changes in the law have made it difficult to transfer lump sum payments by removing the deduction option, financial planners and divorce attorneys may have to seek alternative options such as transferring funds between retirement accounts during divorce proceedings. Consulting a divorce attorney may help individuals protect their tax saving interests.