Divorce planning when it comes to modifying alimony and protecting an inheritance changed after new laws took effect on January 1, 2019. The new tax law, signed by President Trump in 2017, made a few significant changes to how certain aspects of divorce are taxed. Let’s look at what this can mean for you or your friends with an inheritance in or near Vienna, Virginia.
Generally, alimony is given to a spouse in order to better equalize the post-divorce lifestyle to his or her pre-divorce lifestyle. Typically, courts use a number of factors to set the amount of spousal support. The ages of each spouse, their employability, their health, responsibilities for minor children, duration of marriage, and tax responsibilities of each spouse are often the most pertinent factors.
Before 2019, the spouse paying alimony was able to deduct the amount from his or her taxable income. This means a spouse paying $10,000 a year in alimony, but making $180,000 a year, will be taxed at a 32 percent bracket. Because the spouse claimed alimony, he or she would effectively reduce his or her tax liability by $3,200.
Conversely, if the receiving spouse has a taxable income of $50,000 (including the $10,000 of alimony), he or she would be taxed at a rate of 22 percent and pay $2,200 of taxes on it. All in all, the receiving spouse would only get $7,800, and the paying spouse would only pay $6,800.
Many felt that this system subsidized spouses paying alimony. The new law was meant to rectify that supposed “subsidy.”
New Laws and Modifying Alimony
Under the new tax laws that take effect in 2019, the person who pays alimony can no longer deduct the alimony from his or her taxable income. Additionally, the spouse who receives alimony no longer has to include the alimony in their taxable income.
In effect, the paying spouse will be taxed at a higher marginal tax rate.
In order to account for the new tax law that removes this deduction, both partners need to work carefully with their attorney and a certified divorce financial analyst to minimize tax liabilities for both parties.
Receiving an Inheritance in Virginia
Most of the time, an inheritance is not seen as an asset meant to be divided in divorce. This goes for both “community property” and “equitable distribution” states. However, an inheritance will affect how the financial situation of each spouse is assessed.
Furthermore, if a spouse receiving alimony also receives an inheritance, there may be cause to modify alimony or cease it altogether. On the other hand, if a spouse paying alimony receives an inheritance, there may be cause to increase alimony.
Modifications may take place in situations where one spouse’s financial circumstances have changed dramatically. Typically, an inheritance that is expected to be given will not be included in any assessment.
This assessment will contribute to how the court views the spouse who has an inheritance. His or her overall financial stability will be enhanced, and this may affect how much spousal support, child support, and other settlements are valued.
Once again, working with a financial advisor when modifying alimony, valuing an inheritance, or otherwise planning for life after divorce is recommended. Their advice can save both spouses the trouble of renegotiating agreements due to the often-unforeseen financial pitfalls of divorce.
New Laws and Divorce | Inheritance and Modifying Alimony Help
If you’re considering divorce or in the process already, seek the advice of financial advisors so that you can create a fresh slate after finalization. Argent Bridge Advisors offer salient advice with regard to divorce financial matters. Contact us for a consultation today.