Faupel Musser Love, P.C.

The new alimony law may provide a tax break for paying spouses

When President Donald Trump signed the Tax Cuts and Jobs Act into law a few months ago, it made it where come Jan. 1, 2019, alimony will no longer be able to be taken as a deduction on a paying spouse's taxes. It also made it where the recipient wouldn't have to pay taxes on those funds anymore either. What many haven't heard about though is how the new law allows paying spouses to continue taking a tax break.

In the past, the spouse responsible for making alimony payments has been able to take a deduction for them provided that they'd paid in cash. When the new law goes into effect, though, paying spouses will be able to instead transfer funds directly from their retirement accounts. Many see this as a potential upside to the new law.

This means that paying spouses will be able to make an otherwise taxable withdrawal from their retirement accounts without having to pay capital gains taxes on it. If the amount is drawn from an individual retirement account (IRA), then the recipient spouse will now have to pay taxes on what they receive from it.

While this loophole can prove to be advantageous for payers, not all recipient spouses will qualify to receive spousal support via this approach without steep penalties being attached.

Currently, the way IRA funds are structured is to allow for payouts to spouses 59.5 or older without penalty, aside from paying taxes on the funds received. If the recipient spouse is younger than that when the withdrawal is made, though, then they'll be subject to an additional 10 percent penalty.

To facilitate the transfer from an IRA, it must also be clearly spelled out in the divorce agreement and can only happen a single time. Because it will no longer be considered as taxable income, monies received can't be rolled over into another IRA plan.

There are a number of factors that go into determining the amount of spousal support that a husband or wife must pay their ex in Michigan. Certain factors may even make a spouse ineligible to receive alimony under existing state laws. An Ann Arbor spousal support attorney can help you determine whether you may qualify to receive an alimony award in your own case.

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