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New Federal Law for Spousal Support Tax Deduction May Impact North Carolina Alimony Negotiations

Alimony is also known as spousal support and it refers to payments made by one spouse to support the other after separation or divorce. The payments may be lump sum payments or ongoing payments. Generally, post-separation alimony lasts until the divorce is concluded. However, a court may also award alimony after a divorce is finalized. In North Carolina, most spouses that were married 10 years or less don’t get awarded alimony for longer than half the marriage. Recent changes to the tax consequences of alimony under federal tax law will have a major impact in how alimony is negotiated in North Carolina.

 

Historically, alimony has been tax deductible for the paying spouse and had to be reported as income on the recipient’s tax return. In North Carolina, the payment had to be made pursuant to a written separation agreement or court order to be tax deductible and it also had to be in cash. The payment had to be made once the payer and recipient were not part of the same household. The alimony had to be paid within the year the payer was taking the deduction. The deduction could be taken regardless of whether the payer itemized deductions on his or her tax return. The former spouse’s social security number had to be included in the tax return or the deduction could be disallowed.

 

New federal tax laws will eliminate the spousal support deduction starting on January 1, 2019. Attorneys and judges have had to hurry to finalize accelerated divorces that were filed to beat the December 31 deadline. If you file before this deadline those who expect to pay spousal support will be able to deduct money from their taxable income each year, which can result in thousands in savings for higher-income tax filers.

This change will affect both payers and recipients of alimony. A payer will want to negotiate a smaller payment because he or she won’t be able to deduct it. However, recipients of spousal support are also incentivized to beat the deadline. It’s expected that judges will award smaller spousal support payments next year when the lost tax deduction reduces what those who earn a lot can afford. Those who receive alimony after 2018 won’t need to report alimony payments as income and the money will accrue to the person being paid without tax liability.

 

The expectation is that people will be trying to hurry to get their divorces finalized by December. An agreement had to be filed with the court by the first of October to get the agreement processed prior to the new tax law becoming effective. There is a process known as bifurcation that allows a couple to agree regarding the spousal support provisions of the settlement and obtain judicial approval, even if the rest of the divorce is not settled.

 

The old code allowed a household income to obtain tax relief during a divorce because the higher-income spouse would transfer income to a lower-income spouse who had a lower tax rate. However, the new law is anticipated to reduce alimony payments by up to 30%. The impact of the law on child support isn’t yet clear.

 

If you are concerned about the tax consequences of the new federal law and the impact on alimony and other aspects of your divorce, you should contact the Woodruff Family Law Group at 336.272.9122 or via our online form.