Question

Fred and Ida have discovered that if they get divorced in December of this year, file as single taxpayers, and then remarry in the following year, the arrangement would result in significant tax savings. Is this a permissible tax planning strategy?

Note: you are expected to complete this project using current, post-CARES Act law. In other words, apply “new” law to the fact patterns below. To the extent your conclusion is contingent on an unknown fact, you should discuss possible outcomes for different assumptions.

In general, the memos should document the analysis you performed and conclusions of your research. More specifically, the memos should reflect the following about each client’s inquiry:
 Relevant facts
 Issues (questions) identified from the facts
 Applicable primary authority (importantly, IRS Publications may not be your only source for any particular client inquiry)  Conclusions and recommendations reached as a consequence of your research
 Analysis performed (i.e., how the primary authority cited above addresses the issues)

Answer 1

The new tax law in the USA will have an affect on your overall divorce settlement agreement and your taxes post-divorce.

As it relates to the payment and receipt of alimony, prior to the enactment of this new tax law, the party paying alimony was entitled to deduct their payments from their tax liabilities, while the party receiving the alimony payment would end up paying taxes on their alimony as a form of income. This, however, has been turned on its head by the new tax law. Starting with alimony-related judgments after January 1, 2019, the spouse paying alimony will no longer be entitled to deduct those payment amounts from their overall tax liability, and the spouse receiving the alimony payments will no longer have to pay taxes on their alimony payments.

The tax deduction on alimony has often acted as an incentive, or "divorce subsidy," allowing the higher-earning spouse to provide more dollars to their lower-income spouse in the form of alimony, because the payment would be tax-deductible to them. Due to the recipient paying tax at a lower rate than the payer, the recipient pays less taxes, resulting in more money for the family unit.

To help explain the effect of the new law a little better, imagine that one spouse is paying alimony in the annual amount of $20,000. Under the old tax law, if the paying spouse were to pay and then deduct $20,000 per year in alimony, with their income being taxed at the federal rate of 33%, then the previous tax law’s deduction had the potential to save them about $6,600 per year. On the flip side of that equation, the party receiving the alimony payments of $20,000 per year, if taxed at a standard rate of 15%, would see them paying about $3,000 per year in taxes, rather than the $6,600 that the paying spouse would have incurred under their tax rate. As a result, under the old system, the parties would have saved about $3,600 between the two of them, providing the paying spouse a tax break that makes the payments more affordable. These same savings would not be seen under the new tax law due to the difference in the allocation of the tax liability.

To help women bridge this gap, the previous tax bill allowed the non-working divorced spouse to make contributions to an individual retirement account or Roth IRA based on the alimony she was paying taxes on. Going forward, she may no longer be eligible to make these contributions to tax-advantaged retirement savings plans, putting her even further financially behind and further from affording a secure retirement.