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Creative alimony strategies under new tax law

| Dec 31, 2019 | Family Law |

Spouses in Illinois who initiated a divorce in 2019 will find that discussions surrounding the possibility of paying and receiving spousal support to be very different than they might have been a year before. As explained by Market Watch, the full implementation of the Tax Cuts and Jobs Act in January of 2019 turned the taxation of alimony on its head. No longer will payors receive tax deductions and recipients pay taxes on the money. Instead, people who pay alimony will also pay income tax on that amount. 

According to Forbes, some potential alimony recipients might initially think the new tax law benefits them as they can receive tax-free income. However, the reality is that few spouses will agree to pay the same amount of spousal support if they are also paying taxes on it as they would have paid if the tax liability rested with the receiving spouse. 

The new taxation approach to spousal support may well open the door to some more creative and tax-advantageous divorce settlement agreements, especially if the income levels of each spouse vary significantly. Some couples may create a charitable remainder trust instead of making official alimony payments. The higher-earning spouse who would have made alimony payments puts money into the trust and names the other spouse as the beneficiary. The recipient pays taxes at a lower rate than the trust-funding spouse would have paid. After a period of time, the remaining assets flow to a desired charitable organization. 

Spouses may also evaluate the allocation of stocks, bond and other investment assets, taking into account each person’s respective tax bracket and the value of each asset.