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When the Tax Cuts and Jobs Act became law, there were ripple effects throughout the job market, stock market and even the real estate market. One lesser known category impacted by the law though was divorce.

Starting January 1, 2019, the way in which alimony payments can be invested, deducted and taxed are changing – all agreements made prior to the end of 2018 will be grandfathered in. Currently, the alimony payer is able to deduct their payment from their taxes, often lowering their tax bracket and, thus, the amount they owe, while the receiver of the alimony would report the payment at an oftentimes lower taxable income rate.

At the beginning of the year, the new tax law is removing those benefits, which are often used as bargaining tools to create a win-win situation and a more mutually beneficial divorce settlement.

The Retirement Dilemma

For many, part of their income is placed into a retirement account such as a 401k or IRA each year. This often lowers their current tax rate while building their retirement accounts. If someone’s sole or main income is through alimony, the ability to save for old age is hindered greatly and impacts the way they can save.

There are strategic ways to save for retirement though.

With the new law, the recipient of the alimony payment is not able to put that money into a retirement account because the money is no longer considered taxable income. However, the payer can now use retirement accounts to place a dedicated amount of the payment into a designated IRA. Because the payer is setting up an IRA, which is a pre-tax retirement account, they can use this method to use dollars that they would eventually have to pay tax on. When it comes time to withdrawal, 59.5 years of age unless they want to pay a penalty, the ex-spouse will then pay tax on the account like anyone else.

One enticing reason to put money into a retirement account is that it reduces the tax burden. Just because the recipient can no longer take advantage of this tax break doesn’t mean they should forego their retirement savings. Additional earnings can be placed into a taxable account designated for retirement savings.

A certified divorce financial analyst can work with their client, the divorce attorney, the client’s financial advisor and anyone else on client’s team to find out what the most financially intelligent decisions to make are and the ideal ways to structure settlements by using the best financial tools available.

Regardless of whatever side of the divorce one is on, a certified divorce financial analyst will review where their client’s finances stand now and help build a path to ensure short-term needs, like income and expenses, are restructured appropriately and long-term financial needs such as retirement accounts are still on-track to meet specific goals. During times when assets may be in question and the financial future is being reset, the help of a financial advisor can reevaluate and help clients make the smart decisions moving forward.

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The material contained herein is for informational purposes only and does not constitute tax advice.  You should consult with your own tax advisor regarding your personal tax situation.  PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. The material contained herein is not intended as investment advice and does not address or account for individual investor circumstances.  Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance.  The statements contained herein are based solely upon the opinions of Telemus Capital, LLC.  All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

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