How New Alimony Tax Laws Can Affect Your Retirement Savings
In 2019, changes to the reporting and deductions of alimony payments in the federal tax code had a significant impact on the outcome of many divorce cases across the country. In prior years, the payor of alimony was allowed to deduct that amount from his or her federal taxes, and the recipient was required to report the payments as income. Now, alimony payments are no longer deductible for the payor, but the changes are also causing ripple effects. Many people do not realize that the new alimony tax laws can affect their retirement savings. At Rick Davis & Associates, our team of experienced Texas divorce attorneys understands how these changes may affect your case and we are prepared to zealously advocate for your best interests.
Transferring Payments From Retirement Accounts for Payors
Under the new alimony tax laws, the payor of spousal support will be allowed to transfer funds from an existing retirement account for alimony payments. Using this method, the finalized divorce agreement would need to stipulate the use of an individual retirement account (IRA) as the method of payment. Once the receiving spouse withdraws the payment from the IRA, he or she will pay tax on it. The payor spouse with the IRA does not have to pay taxes on that amount that would have otherwise been required if he or she withdrew the amount.
However, it is important to note that in order to structure an alimony payment in this way, the receiving spouse must be at least 59.5 years old or else a 10% penalty applies. In addition, this method is typically a one-time withdrawal, so if periodic payments are requested, they will need to come from another income source or split between a one-time lump sum from the IRA and smaller payments from another source. An experienced divorce attorney will be able to review your options and advise you on the best option for alimony payments.
Restrictions on Retirement Savings for Recipients
The changes to the alimony tax laws may also affect retirement savings for the recipients of spousal support. Prior to the changes, alimony payments were considered taxable income for recipients and as such could be invested into an IRA. Because recipients no longer get to claim their alimony payments on their federal taxes, that money cannot be invested into a retirement account. Alimony payments will need to be directed into a different, taxable type of financial instrument. As such, alimony recipients should speak with their financial advisor about how this shift may affect their overall retirement savings plan.
Call or Contact Our Office Today
If you would like to learn more about how the changes to the tax laws may affect your alimony payments in a Texas divorce, call the office or contact us at Rick Davis & Associates in Bryan, Texas today to schedule a consultation.