Spouses in North Carolina considering divorce may wish to learn about the impact of the Tax Cuts and Jobs Act on their future plans for spousal support and alimony. In the past, the recipient paid taxes on the alimony while the payer could deduct the sum. This situation will be reversed for newly concluded divorces starting in 2019.
Spouses who conclude their divorces in 2018 will continue to pay taxes according to the existing system, a procedure which incentivizes spousal support payments by reducing the tax burden of the higher earner. For divorces in 2019 or later, however, the recipients will no longer pay taxes on the alimony income. While some have promoted this as a positive for spousal support recipients, this is an unlikely outcome. By including the alimony amount in the higher-earning spouse’s higher tax bracket, there is less incentive to agree to generous payments.
In addition, there can be other negative consequences for alimony recipients. Because the funds will no longer be taxed, they can’t be invested in specialized tax-restricted accounts like individual retirement accounts. However, family law attorneys can work to develop unique systems that can benefit both divorcing spouses and protect each person’s standard of living. For example, by transferring retirement savings as alimony, the paying spouse can still achieve tax benefits.
When spouses decide to divorce, the consequences could have major emotional and financial ramifications. A family law attorney can help a divorcing spouse advocate for a fair financial outcome in regard to alimony, spousal support and asset division.