Options for alimony and retirement accounts

On Behalf of | Jan 23, 2020 | Divorce |

Married residents in Nebraska who have made the difficult decision to pursue a divorce must forge through many equally difficult decisions in figuring out how to create new and separate lives for themselves. These decisions include how to divide their marital assets and shared debts. For some couples, spousal support payments may be offered as an option in a divorce settlement. Before agreeing to making or receiving alimony, however, spouses should understand how these payments are viewed under the new tax code. 

MarketWatch explains that before the new Tax Cuts and Jobs Act went into effect, a recipient of alimony reported the money as income on their tax return and paid the appropriate income tax on the funds. A payer of alimony, in turn, deducted the money paid from their tax return to essentially lower their tax liability. Now, however, this has completely reversed. For this reason, the spouse who may have to pay alimony should consider their alternatives very carefully as they would now pay taxes on the funds. This reversal impacts all divorces finalized after January 1, 2018 and any divorce modification agreements finalized after that date. 

According to CNBC, however, there may still be a way for couples to make alimony payments taxable to the recipient rather than to the payer by leveraging retirement account funds to make spousal support payments. 

Money may be withdrawn from a retirement account and paid directly to a spouse who is at least 59 years and six months old. That recipient must pay income tax on the money. The terms of this type of transaction must be clearly outlined in the divorce agreement.