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The Effect of Taxes on Alimony Awards in Divorce Proceedings in Charlotte

Alimony is money paid by a former spouse to support the other after a divorce and is intended to prevent any unfair economic effects on a dependent spouse. According to North Carolina statutes, a court is to consider 16 factors when determining the amount and duration of alimony to award in a divorce proceeding, such as marital misconduct, duration of the marriage, and previous standard of living. Among these 16 factors includes the federal, state, and local tax ramifications of the alimony awards.

If you are thinking about divorce, or have already filed, and have questions about alimony, we can help. Contact the attorneys at Arnold & Smith, PLLC today for your initial consultation. We can review your case and help protect your rights.

Tax Ramifications of Alimony Awards

According to North Carolina Statutes, a court is authorized to consider potential tax ramifications when awarding alimony, such as:

  • The different impacts of an award for parties in different tax brackets
  • The impact of ordering a transfer of appreciated property as alimony if the dependent spouse will be liable for capital gain on the property upon sale
  • The taxes on the marital home conveyed as alimony

The bottom line is that when determining an alimony award, the court must be mindful of any potential impacts it may have on the divorcing parties. The weight the court chooses to place on this factor, however, is completely within their discretion. A party can provide evidence to convince the court to place greater weight on the tax ramifications of an alimony award.

When a party presents evidence on a specific alimony factor, the court must review the evidence and provide the parties with their reasoning for how it affects the alimony award. Accordingly, in the event evidence is presented by either party related to the tax ramification factor, the court must provide specific findings to support its determination, or else that portion of the judgment will be remanded.

The Tax Cuts and Jobs Act

In 2017, Congress signed into law the Tax Cuts and Jobs Act. The bill only affects alimony payments under a divorce agreement or order entered after 2017. Previously deductible, alimony payments no longer qualify as tax deductions as a result of the bill’s passage. In creating the Tax Cuts and Jobs Act, Republicans interpreted the tax deduction as a divorce subsidy, reasoning that a married couple would pay more taxes on their joint income than they would as a divorced couple under the original system.

Before the enactment of the Tax Cuts and Jobs Act, the original system allowed the payor of alimony to list their alimony payments as a tax deduction. The reasoning behind the old rule was to help make these continuing, often sizable, payments more affordable for the payor and give them a break on their income taxes. The spouse receiving the payments was then required to declare the alimony payment as taxable income, thus placing the responsibility on them for potential taxes. This shift of the tax burden has now been eliminated by the Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act Effect on Alimony Awards in Divorce Proceedings

The Tax bill drastically changes the alimony tax deduction rule by shifting the responsibility of paying taxes on alimony to the supporting spouse. Also, the dependent spouse receiving alimony payments is no longer required to report the money received as income for federal income tax purposes. What this means, is that in determining alimony awards, the supporting spouse is likely to present evidence to the court concerning this shifted responsibility and will argue that the Tax Cuts and Jobs Act unfairly affects them and that as a result, the court should order a lower alimony award. This also means that individuals who divorced before 2017 may now be subject to the new rules, if the alimony award originally ordered is modified.

Contact Us Today

If you need legal advice concerning the tax ramifications associated with your divorce, we can help. At Arnold & Smith, PLLC, we understand how overwhelming this time can be. One of our family law attorneys can help walk you through the process and provide you with advice to best move forward. Contact us today to schedule your initial consultation. For your convenience and safety, we now offer video and phone conferencing. If you prefer an in-person consultation, we have three easy to reach locations in Uptown Charlotte, Monroe, and Mooresville.