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Tax law complicating divorce and retirement

Changes to the federal tax laws, taking effect on Jan. 1, end the long-standing deduction for spousal support payments. These changes have not only rushed divorce negotiations, as expected, but have also resulted in complications accessing money for settlements and making long-term preparations for people over 50.

Divorce settlements for these couples are complex because they have fewer viable years remaining during which they can stay in the work force. Traditional gender roles are still prevalent in this group where many wives stayed home to raise their children while the husband worked, and as a result they may not have the marketable skills they would need in order to stay competitive in today's technologically-minded job market.

The marital home and retirement accounts are usually the two largest assets for these couples. When a large amount of debt remains with the house, a spouse may reconsider seeking this asset. The spouse who is awarded the house may sell it and place the funds into a retirement investment account.

Also, assets like retirement accounts have tax advantages. A spouse who is awarded a retirement account pays lower capital gains taxes while cash has full tax liability except where there are embedded capital gains.

Roth IRAs also have advantage over 401(k) assets because the taxes on a Roth account were already paid. A proper court order should also accompany any asset distributions, especially for pensions, because of the potential tax penalties.

Conducting a valuation of private business will be especially important. The new tax law granted several advantages to businesses which will not be known until next year. Even if a business is not being sold, its value must be assessed in a divorce.

Finally, the loss of the tax deduction for paying spousal support also means that the recipient spouse may not claim it as earned income. This eliminates contributions to IRAs and Roth accounts. With no other earned income, tax-advantaged accounts may not grow.

Without these investments, a divorce settlement may not be enough to pay bills. Being ineligible for Medicare and Social Security can also compound this problem.

A spouse considering divorce should seek immediate legal assistance. An attorney can help seek a fair and reasonable decree that meets their financial needs.

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O'Brien Family Law, PC 

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