The alimony deduction has been an essential part of divorce strategy for more than 50 years. The ex-spouse who paid alimony was able to deduct his or her payments and the receiving ex-spouse paid taxes on the amount they received.
While divorces in Florida and elsewhere finalized before the new tax law will keep that status, all divorces during and after 2019 will no longer allow those who are paying support to deduct alimony, while recipients will no longer have to pay taxes on support.
New law brings more severe tax consequences
Under the old law, a spouse with $500,000 of income who paid their former spouse $150,000 in alimony can deduct that amount reducing their taxable income and putting them in a lower tax bracket. While the receiving spouse pays taxes on that amount, the overall benefit for both spouses was a tax savings of $22,500.
The new law may seem like a better deal for the receiving ex-spouse by escaping tax liability. However, experts say the likely impact is that payers will owe more taxes but pay less alimony while the recipient won’t pay any taxes but receive far less money.
Strategies to reduce overall tax liabilities
Smart high net worth couples can use various strategies for tax savings, especially when there is a significant difference in their tax brackets. These strategies include:
- Fund alimony with retirement account funds at pre-tax values
- Create a charitable remainder trust
- Strategically divide investments for each spouse
Seek legal advice for a high net worth divorce
Tax laws are complicated, and every family’s situation is unique. The strategies mentioned above will not be a good fit for everyone. That’s why working with an experienced family law attorney here in Florida can minimize your tax responsibilities and help create a plan that is responsive to ever-changing tax laws.