Law Offices of Matthew S. Schultz, P.C.
480-900-6032

How tax changes could complicate gray divorces

Couples in Arizona 50 and over who choose to end a marriage understandably have many concerns, but one of the most pressing ones is often retirement security and savings. However, the Tax Cuts and Jobs Act of 2017 will change how certain assets are divided starting in 2019. The most noticeable adjustment to tax guidelines concerns alimony. Spousal support payments will no longer be deductible by the paying party or claimable as income by the recipient.

For older couples, a high-asset divorce can be more complicated. Part of the reason for this is because both parties may have contributed to retirement savings. Also, some soon-to-be-former-spouses still have several working years left, which means there are concerns about being able to build and maintain a sufficient nest egg individually. With high-asset couples divorcing after many years together, top assets typically include the marital home and retirement accounts. While it may be tempting for an older spouse to fight for the home, it may be a wiser move to sell it and put the money into a retirement investment account.

Older couples are also advised to pay attention to the actual worth of certain assets. For instance, under the tax law, future growth and distributions on Roth IRAs are tax-free. So, a Roth account would be worth more than a 401(k) or IRA for the same amount. On the other hand, embedded capital gains could reduce the value of a brokerage account. Therefore, it may be better for a spouse to seek a cash settlement instead when such accounts are among the assets being divided.

Since the valuation of private businesses is also changing because of the tax law, an attorney may suggest that a high-asset divorce client who owns a business have its value assessed. With pensions, a lawyer might be able to prepare a legal order for asset distributions to help offset possible tax penalties. Retirement account splits and the amount each spouse will get will need to be covered in a divorce decree to minimize the risk of incurring tax penalties. A qualified domestic relations order is needed for workplace retirement plans that will be shared.

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