Minimizing Alimony Taxes in a Texas High Net Worth Divorce

 Posted on December 11, 2019 in Spousal Support

Paying alimony or maintenance after a Texas high asset divorce can cost tens of thousands of dollars for high earners. Yet there may be options available to parties in a high net worth divorce to limit the amount of taxes paid on alimony. Once you know that your spouse is entitled to receive maintenance under Texas law, you will likely be wondering whether there are ways to limit the amount of taxes that you will pay on those alimony payments. Indeed, since the payor spouse is responsible for taxes on the maintenance payments, those taxes can be significant.

While a court order for maintenance does not provide options for minimizing maintenance taxes in a high net worth divorce in Texas, entering into a marital settlement agreement with your spouse in which you provide an alternate form of compensation in lieu of maintenance payments could allow you to minimize taxes substantially. There are certain methods for reducing or minimizing alimony taxes for the wealthy, discussed below.

Minimizing Taxes on Maintenance in Austin, TX

Texas law caps maintenance payments at $5,000 per month, Yet even taxes on payments of $5,000 are probably more than you would like to pay. As we said above, there may be options to reduce the total amount of taxes you will pay. Options that may be available include but are not limited to the following:

Work out a property settlement that involves a transfer of retirement assets in lieu of spousal maintenance: When you transfer retirement assets into your spouse’s retirement account with a Qualified Domestic Relations Order (QDRO), you can do so without the 10 percent penalty (which you would be assessed outside the divorce context) and without being taxed on the amount. This can be particularly useful for high earners who anticipate being able to quickly make up for a depleted 401(k) or other retirement account as a result of a divorce settlement.

If you imagine that you would be ordered to make maintenance payments of $5,000 per month and would be required to do so for five years, that would total $300,000. If we say that alimony would be taxed at a rate of .32 percent, you would end up paying $96,000 in taxes on that money over the course of the five years. However, if you can transfer $300,000 to your spouse’s retirement account as part of a marital settlement agreement, you may be able to avoid all of those taxes on money you are paying to someone else.

Move alimony payments into a trust: Wealthy people can set up a grantor trust to pay alimony to a former spouse, generating income from the money put into the trust. To be clear, the money from the trust would not be categorized as a maintenance payment, but instead would be part of a marital settlement that would not incur the taxes associated with alimony payments.

Negotiating tax value of dependents: The article also suggests that some parties in high asset divorces can negotiate the tax value of dependents, yet this is typically only helpful for relatively wealthy individuals and not for the ultra-wealthy since child tax credits cease to matter with an income of $240,000 or more. Contact a Texas high asset divorce lawyer to learn more.

Contact an Austin High Net Worth Divorce Lawyer

Whether you need assistance with maintenance tax concerns or other high asset divorce issues, an aggressive Texas high asset divorce attorney can help with your case. For additional matters, a complex child custody attorney or complex litigation attorney at our firm can speak with you. Contact Powers Kerr & Rashidi, PLLC online or by phone at 512-610-6199 to learn more.

Source:

https://www.nytimes.com/2019/04/19/your-money/taxes-tips-divorce.html