On December 31, 2018, The Tax Cuts and Jobs Act goes into effect, eliminating the coveted tax deduction for alimony. Divorces completed before the end of the year will be grandfathered into the old law, where the payer will receive the tax deduction and the payee will be taxed. Residents of Maryland and other states could use Individual Retirement Accounts as bargaining chips in lieu of alimony payments.
Tax experts predict IRA accounts will soon play a major role in divorce discussions as tax deductions for alimony payers disappear in 2019. For ex-spouses to receive tax deductions under the old law, payments had to be made in cash. A new alimony planning opportunity is available to divorcing couples using IRAs, and the account can be transferred tax-free from one spouse to the other.
Taking an IRA instead of alimony may not work for those who need immediate support to sustain a living. IRA accounts are subject to a 10 percent penalty for withdrawals made before age 59 ½, and no one is exempt from this. If the recipient of the IRA is financially sound enough to wait to make withdrawals, he or she can enjoy the tax-deferred growth that will provide retirement income.
Emotions run high during a divorce and can leave a person feeling confused. In Maryland, it is important to have questions answered about the changes in the alimony tax credit and how it might impact one’s divorce settlement. An attorney who knows the new tax laws can help determine which approach is right for his or her client.