One of the most frequently contested elements in a divorce proceeding in North Carolina is alimony. When spouses separate and live apart, one’s quality of living may wind up affecting more than the other due to the change in income. If one spouse made more than the other, a judge may order alimony.
A controversial tax change went into effective Jan. 1, 2019, aimed to change the alimony landscape, leading many to rush to finalize divorce proceedings.
Alimony is no longer tax deductible
One of the selling points of spousal support for the payer was the tax deduction. Before the new law went into effect, the payer got to write off alimony on taxes thereby decreasing their tax bracket. In high and middle-income situations, these tax savings presented a plus when negotiating a divorce settlement.
On the flipside, the recipient of alimony had to report the money as income on their tax returns and pay the required taxes.
However, as of Jan. 1, alimony payments can no longer count towards a tax deduction. This means the payer will have to pay taxes on the alimony payments, not the recipient. The financial implications of this change mean far fewer people will agree to alimony during mediation, which may result in more cases going to trial.
The real problem caused by the change
With fewer funds at the ready during divorce proceedings, recipients will not get more money even though the change implies they would. Where payees may have agreed to $25,000 a year in spousal support payments, because it is no longer deducted from their taxes and they no longer get a tax break, they may only afford to pay $15,000 a year. Recipients in this situation will lose approximately $6,000 a year, even though they no longer pay taxes on the money. That is a significant drop in income for a former spouse relying on it.
The law aimed to help spur the economy as part of a total tax and jobs bill. However, both parties in a divorce may come out losers in this area, adding stress to an already highly volatile situation.