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New Taxes Will Change NC Alimony Payments in a Big Way

Tax Laws and Alimony in NC

New tax laws will change alimony in a big way starting in January 2019.  That because it will fundamentally affect spousal support, alimony payments, and how much money is available for alimony.

2018 was a wild year for family law attorneys in Charlotte, as people rushed to settle matters before the new tax laws went into effect.

The new normal is expected to result in substantial changes in how alimony is set or agreed to in NC.  We predict there will be less money out there, as the spouse paying alimony will no longer be able to deduct alimony payments.  That’s a big deal – Bill Powers, Divorce Lawyer Charlotte NC 

Alimony No Longer Tax Deductible - Divorce Lawyers Charlotte NC

Alimony in North Carolina is “spousal support” to one of the former parties in the marriage after an NC divorce. Child support is different, although it may also be paid to the person receiving alimony.

People looking for legal advice commonly ask, “How much is alimony in North Carolina?”  or “How does the new tax law affect alimony.” Calculation of alimony payments can be a complicated, complex process.

Alimony (marital support) is often disputed in any divorce case.  Alimony payments can also be ordered by the Court if the parties just can’t agree.

The Charlotte divorce lawyers at our firm believe the tax-law change has the potential to make negotiations tougher in divorce cases. There will be less money for spousal support since more cash goes to government taxes instead of alimony.

Once the new tax-related divorce law goes into effect:

  • The spouse paying alimony can’t take alimony payments in NC as a deduction
  • The spouse receiving the money, the “dependent spouse” won’t pay taxes on alimony

That may seem like a good idea, but the ability to deduct alimony payments has a BIG effect on how much money is ultimately available as part of a divorce.

Here’s the math

Lets say high-earning Spouse A now pays and deducts $30,000 each year in alimony payments. Spouse A’s income is taxed at about 1/3rd (33%).  Being able to deduct alimony payments, it saves Spouse A about $9,900 in taxes every year.

Prior to the tax law change, lower-earning Spouse B is required to pay taxes on alimony at a 15-percent rate, which works out to around $4,500 as taxable income from the alimony payment.  Spouse A and Spouse B save $5,400.  And Spouse A got a tax-break, which made the alimony payments more affordable.

In the long-run, the only person who will get more money from a divorce will Uncle Sam.  And the spouse receiving alimony payments will most certainly receive less alimony when it’s all said-and-done.

Even if alimony is no longer considered “taxable income,” the bottom line won’t be good for the party receiving post-marital support.

 

Why Did Congress Change Taxes on Alimony? 

The United States Congressional House Ways and Means Committee, who is responsible for the new law, calls the current alimony deduction a “divorce subsidy.”  Right now, alimony payments are tax deductible to the person PAYING ALIMONY.

The new tax law completely removes the deductible, making alimony payments 100% taxable.

“A divorced couple can often achieve a better tax result for payments between them than a married couple can,” is what a representative on the committee pointed out.

As justification for the new law,  it’s argued that alimony should be treated like child support.  CHILD SUPPORT already is NOT tax-deductible for the payer.  Similarly, child support is NOT taxable for the recipient of the support.

The Joint Committee on Taxation, a non-partisan division of Congress, estimates repealing the deduction will add $6.9 billion in new tax revenue over 10 years.

Why Are Charlotte Divorce Lawyers Concerned About Alimony Deduction?

Divorce lawyers worry that without the deduction, higher-earning spouses won’t pay as much alimony to their former spouse. Tax experts believe alimony recipients may lose anywhere from 10% to 15% percent of what they’d get under the current alimony laws.

Congress is taking money from people at the absolutely worst time in their life, after they’ve gone through a divorce.  Ending a marriage in itself traumatic.  This is going to be tough on people who must survive on alimony – Bill Powers, Divorce Lawyer Charlotte NC 

Some prenuptial agreements have provisions based on the alimony tax deduction always being in place.  It might require a long-term assessment of the alimony laws and alimony guidelines in North Carolina.

The American Academy of Matrimonial Lawyers and the National Organization for Women are against the change, favoring the current status of an alimony tax deduction.

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