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Planning for alimony

On Behalf of | May 29, 2018 | Divorce

Michigan residents who plan to get a divorce should know that due to the passage of the Tax Cuts and Jobs Act, they will not be able to deduct any alimony they have to pay to comply with separation of divorce agreements that become effective in 2019 and later. For the recipients of alimony, they will not have to pay taxes on the alimony they receive. As a result, people who get a divorce after 2018 are less likely to have after-tax income that can be used for alimony, and the federal taxes that will have to be paid are likely to increase.

The changes in the tax law can also be used as an aid in divorce negotiations. Specifically, the increased worth of tax-deferred retirement savings can be used as a bargaining tool.

There are several conditions that have to be met in order for alimony payments to be deductible, one of which is that they have to be submitted in the form of money. However, these conditions do not apply to nondeductible alimony, which can be paid in the form of property, such as real estate, stock shares or retirement funds transferred from a 401(k).

Thanks to the new tax law, alimony recipients will not be able to fund IRA contributions as easily as they did before. Because taxable alimony income is considered to be compensation, those who receive the alimony can fund their IRA contributions. However, tax-free alimony is not classified as compensation, which can hinder an individual’s ability to grow tax-friendly savings.

An attorney who practices divorce law may litigate to obtain favorable settlement terms regarding the division of financial assets and other types of property for clients. The attorney may advise clients about which legal avenues should be pursued to resolve disputes regarding divorce legal issues.

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