August 18, 2019

Wealth Matters: 4 Tax Strategies That Could Make a Divorce Settlement Easier

Others complain that such trusts are another tax provision that favors the ultrawealthy.

“If you don’t have a lot of property to split up, you’re going to have to pay alimony, and now you’re going to have to do it in after-tax dollars,” said Christina M. Baltz, partner at the law firm Withers. “To a certain extent, you can say this is another Trump tax change that’s hit the middle class and not the upper class.”

The limitations on state and local tax deductions surprised many who saw their tax bill go up. When it comes to divorce, that limitation can turn the home, a prime marital asset, into a hot potato.

Until this year, the spouse with less money would often want to keep the marital home for the children, but doing so now has become more costly, said Alvina Lo, chief wealth strategist at Wilmington Trust.

In one example Ms. Lo’s group worked on, a spouse who earned $70,000 got the house, worth $1.5 million, while the other spouse kept an equivalent amount of liquid assets. But with property taxes of $25,000 a year that were no longer fully deductible, the client’s tax bill increased by 25 percent. She had to sell.

“When you’re counseling clients, they feel like they can control their spending and the money going out, but when you show them their number, this is not discretionary spending,” Ms. Lo said. “These are hard dollars you owe Uncle Sam regardless of your expenses.”

In a high-property-tax state like New Jersey, some divorcing couples are looking to get rid of second homes as well, said Sandra C. Fava, a partner in Fox Rothschild’s family law group.

“People have vacation homes at the Jersey Shore, and now they’ve lost the deduction for property taxes on their main home and second home,” she said. “That’s caused a real difference to their finances.”

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