Right here is the brand new tax-deferred manner of paying alimony

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Since the tax advantages of maintenance payments will no longer apply in 2019, it is to be expected that the individual retirement account will come to the fore in divorce talks.

This is a prediction by Ed Slott, CPA and founder of Ed Slott and Co. He moderated a discussion on IRA planning at the American Institute of CPA’s Engage conference in Las Vegas.

Today and under the old tax law, a spouse pays alimony and collects a benefit in the form of an input tax deduction in his income tax return.

“It is almost always the case that the spouse paying the alimony was in a higher tax bracket than the one receiving it,” said Slott. “The payer gets a large deduction and the other spouse collects it as income in a lower tax bracket.”

The divorce bill has changed under the Tax Cuts and Jobs Act.

For couples who divorce and separate after December 31, 2018, maintenance is not deductible. Existing divorces and separations are not affected.

Under the new law, IRAs can offer divorced couples an opportunity to plan maintenance expenses, provided the conditions are right, Slott said.

A negotiating tip

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In order to claim a maintenance allowance, the old law requires that payment be made in cash.

Since the payments are no longer deductible from 2019 onwards, a divorcee can give the receiving spouse an IRA as a lump-sum maintenance payment.

The higher-income spouse sends an account that would have charged him with income tax if he had withdrawn cash.

“When the husband gives his ex-wife the IRA, he is giving money that he would have paid taxes on,” Slott said. “He’s actually getting a print.”

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The beneficiary spouse, who is presumably in a lower tax bracket, is responsible for income tax as soon as he deducts a distribution from the account.

They can also be fined 10 percent if withdrawn from the account before the age of 59½.

The actual transfer of the account from one spouse to the other is tax-free.

Be careful though. This strategy is not suitable for divorced people who need immediate spousal support.

Short term or long term

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Because the recipient spouse can pay taxes and penalties for early withdrawals from the IRA, this strategy will not work if they need cash to make a living.

“If the receiving spouse is under 59½ years old, this may not be the best deal as there is a 10 percent penalty on all withdrawals,” said Slott. “There is no exception to this.”

Still, an ex-spouse who can afford to wait to withdraw will enjoy the benefit of tax-privileged growth within the IRA over time.

As soon as the recipient can tap into the account with impunity, the IRA can also provide them with pension income.

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