Given that about 3 out of every 1,000 residents in Texas have been through a divorce at some point in their lives, Texans are no strangers to the complexities inherent in the divorce process. It is an emotionally trying process, and there are numerous details to be ironed out, including child custody, asset division and alimony payments, each of which is subject to different laws that further complicate matters.
In order to see how confusing the process can be, one needs to look no further than how the Tax Cuts and Jobs Act has affected the process of alimony payment. Under the new law, alimony payments are no longer tax deductible for the payer, and the payment received is no longer subject to income tax for the recipient.
As a result, divorcees may need to start finding different payment structures that will suit the needs of both parties, such as utilizing tax-favored account balances. For instance, in the event that a couple is separating, one party might end up being taxed in the 35 percent tax bracket while the other will be in the 22 percent bracket; it might be beneficial for the party making more money to pay alimony in the form of pretax retirement savings to the other party instead of direct cash. This payment could happen as a property settlement or as a direct alimony payment. If this is performed as a property settlement, it is not taxable by the IRS, and any withdrawal the recipient makes will be taxed at the lower rate of 22 percent.
Each case is different, and what works for one couple may be wrong for another. Divorcing individuals may wish to consult an attorney for advice about the best way to proceed. An attorney may also be helpful if a divorced couple seeks agreement modification.
Source: “2012 Marriage and Divorce.” Texas Department of State Health Services. 13 August 2015.