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The impact of The Tax Cuts and Jobs Act on alimony payments

For many ex-spouses in Colorado, coming to an agreement on alimony can be an arduous task. To begin with, creating a payment structure that offers the recipient what they want while helping the payer maintain as much of their income as possible is no easy feat. Additionally, laws are constantly changing, forcing soon-to-be exes to reassess how they plan to settle matters.

A prime example of how new laws can impact the divorce process is the Tax Cuts and Jobs Act that came into effect early last year. In a nutshell, the act precludes individuals paying alimony from deducting payments from their taxes. For recipients, the payments will no longer be taxable income. However, this reversal is only applicable to alimony settlements that take place after 2018.

Even though this new law may seem more favorable to the alimony recipient than the payer, this is not always the case. Reducing the overall after-tax income of the payer also reduces the overall available money for both parties to split. Furthermore, since as alimony is no longer considered as compensation, i.e. wages, it can no longer be used to fund IRA contributions by recipients.

However, the new law does allow for some creative payment restructuring that may be to the benefit of both the recipient and payer. Spouses may transfer tax-favored account balances, which can be done either as a property settlement or as direct alimony. Naturally, these kinds of solutions are inherently complex and riddled with conditions and stipulations. Therefore, those interested in creative alimony strategies may want to reach out to a family law attorney.

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