President Trump signed The Tax Cuts and Jobs Act on December 22, 2017, eliminating a long-standing fixture in Family Law--the alimony tax deduction. The final Tax Cuts and Jobs Act did, in fact, remove the taxable and tax-deductible classification of alimony.
The net result of the tax application under the old IRS code is: typically, a divorced couple would pay less in federal taxes, overall, since the spouse in the higher tax bracket that pays alimony reduces their taxes paid while the spouse who receives alimony, and pays income tax on it, is usually in a lower tax bracket. This result has often been referred to as the “divorce subsidy.”
Under the new Tax Cuts and Jobs Act, the payor does not receive any tax-deduction for alimony and the recipient of alimony does not pay any tax on what is received. While this tax plan has not been put into effect, it essentially removes the “divorce subsidy” and results in an overall larger amount of federal taxes being paid by divorced couples. This new application applies to any Alimony Order or Agreement entered after December 31, 2018, so there is roughly 1 year to reach agreements or have court awards receive the now-expired tax benefits of alimony.
If an Alimony Order or Agreement entered before the end of 2018 is modified after, it may be able to continue to maintain the tax benefits unless the new Order or Agreement specifically states that the paying spouse should not receive the tax deduction, or the receiving spouse should not pay income tax. The IRS has not yet updated their Code nor have they issued any guidance on the application of this new law, but it will nevertheless be a substantial change to how alimony is calculated in Family Law cases.
Contact Our Charlotte Divorce Lawyers Today
If you have any questions about the effect of the new tax law on your alimony or about any other North Carolina Family Law issues, call us today at 704-810-1400 to schedule a consultation.