Alternate Tax Strategies In Alimony Cases
Since any alimony arrangement made after January 1, 2019, will not be deductible from the gross income of the spouse paying it nor includible in the gross income of the spouse receiving it, an alternate method of gaining a tax benefit to the paying spouse may be to have that spouse transfer 401(k) funds by way of a qualified domestic relations order or IRA funds to the recipient spouse. These funds are tax-sheltered until accessed so the paying spouse never had and will never have to pay income tax on those funds if transferred to the recipient spouse. If the recipient spouse is in a lower income tax bracket than the paying spouse, even though she will pay taxes on the tax-sheltered funds when accessed, it will be at a lower income tax rate.
Of course, there are issues when considering the transfer of tax-sheltered funds in lieu of alimony. The recipient will gain the benefit of future gains that are tax-sheltered until they are accessed. However, if the recipient is under
59 1/2 and needs to access some or all of the funds, the recipient might be responsible to pay a 10% income tax penalty for the funds received.
Nevertheless, including tax-deferred IRA or 401(k) funds in future divorce negotiations is now an option that divorcing couples and their financial planners can use to meet their particular needs in new, creative ways.
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