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Tips for dealing with new alimony tax laws

California couples who are getting a divorce may be aware that starting in 2019, tax laws around alimony are changing because of the Tax Cuts and Jobs Act. For divorce agreements finalized after the end of 2018, alimony will no longer be tax-payable or tax-deductible. This may mean the person who pays alimony remains in a higher tax bracket while still having to pay, and overall, it is anticipated that there will be less money for both people.

As a result, some couples may want to try to reach an agreement before the end of the year. First, they should consider what their priorities are and what their spouse's priorities are likely to be. It may help for people to consider what they most want after the divorce. Next, a written agreement must be drawn up. Even if the agreement is not perfect, it can be modified later if necessary.

However, the potential for tax savings does not mean that either person should rush into an agreement that is not good for them. They may want to work with a financial planner to explore alternatives. People might be able to keep some of the tax benefits alimony would have provided by having the higher-earning spouse keep high basis taxable assets and give tax-deferred assets to the lower-earning spouse.

If couples can work together to plan how they will split assets in this way, it may be to their advantage. Litigation could result in an asset split that is not as satisfactory and over which they have little control. However, negotiation is not always possible. One person may be trying to take advantage of the other in the divorce, particularly in divorces involving significant assets, and if this is the case, litigation may be necessary. An attorney may be able to assist with negotiations or litigation.

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