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Tax law changes and divorce: more pain in the coming year?

There has been much discussion about how 2019 will bring new changes in the tax laws and how they will impact the average taxpayer. One of the most discussed is how the tax code will flip how alimony is taxed. This change is expected to play a significant role in future divorce filings in every state, including here in Colorado.

In the past, the Internal Revenue Service permitted the higher-earning spouse to deduct the cost of alimony payments. The recipient was then expected to report those payments as taxable income. The revised tax code will no longer permit the deduction and the receiver will no longer be taxed. However, this change is expected to result in more bitter divorces as the paying spouse is more likely to fight having to make these payments. This, in turn, will financially harm the lower-earning spouse, who will likely receive less.

Professionals are encouraging couples to work closely with their attorneys and other financial advisors in order to determine the best manner of splitting assets to avoid higher tax costs. One way may be to revisit prior prenuptial and marital agreements to ensure that they will take advantage of the current tax laws. Also, if any settlements need to be modified, it may be prudent to include a provision that will ensure that the previous laws are upheld.

Those who are higher-earning spouses may wish to allow a lower-earning spouse to take over any IRA accounts since they can avoid taxes when funds are later accessed. Each party is encouraged to carefully review the settlements in order to avoid as many tax penalties as possible. Those who will be seeking a divorce in 2019 may wish to slow the process in order to become more informed about how the tax laws will impact them. Colorado residents may choose to consult with an experienced attorney who can best guide them through a settlement that best meets their needs. 

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