The Tax Cut and Jobs Act introduced into the United States House of Representatives on November 2, 2017 could have a huge impact on couples in process of, or considering, divorce. The Act contains a provision which would eliminate the Alimony Deduction. You’re likely asking yourself “How might this affect me at tax time?”
Let’s first start with what it takes to be awarded alimony in the State of North Carolina. There must be a showing of three things: 1) that one spouse is a Dependent Spouse; 2) that the other spouse is a Supporting Spouse; and, 3) that the Dependent Spouse was actually dependent on the Supporting Spouse during the marriage. This is a fact-specific determination and the reason why it is hard for your family law attorney to give a definitive answer as to whether alimony will be awarded to you. Adultery can be an exception to the rule and you should discuss this with your attorney in more detail.
Under the current tax plan, alimony is tax deductible to the payor (Supporting Spouse) and taxable to the payee (Dependent Spouse). The proposed Tax Cut and Jobs Act is seeking to close the gap of taxable income stemming from the Alimony Deduction. This could have a huge impact on families in transition. Under the proposed Act, the payor (Supporting Spouse) would no longer be able to deduct their alimony payment from their taxable income and the payee (Dependent Spouse) would no longer pay taxes on the money they receive. This means that funds that go to pay alimony will almost certainly be taxed at a higher tax bracket.
While it may appear to be a bonus for the receiving spouse, it most certainly is not. The Alimony Deduction allowed for couples who once shared one household to more affordably cover the expenses of two households. For example: “Say the [Supporting Spouse] is paying $3,000 in monthly alimony and is taxed at 33%. In effect, the deduction at tax time reduces each of those payments to $2,000. On the receiving end, say the [Dependent Spouse] is in the 15% bracket. The $3,000 they receive is reduced by $450, which goes to taxes, leaving her with $2,550. Under the proposed change, providing the [Dependent Spouse] with the same level of support would cost the Supporting Spouse $2,550 instead of $2,000.” “Divorce penalty? Tax reform could shrink alimony for ex-spouses” USA Today.
In effect, under the proposed act, it would cost more money for the Supporting Spouse to support the Dependent Spouse. This will likely mean that Supporting Spouses will be highly motivated to eliminate or reduce their obligation to the Dependent Spouse.
It is not uncommon for spousal support issues to be resolved through settlement; due in large part to the creative problem-solving that the Alimony Deduction allows. Without the Alimony Deduction, it is not a stretch to imagine that more cases will go to litigation. As North Carolina has no spousal support guidelines, it will fall to the Judges and Arbitrators to determine the fairest way to allocate the available income without an Alimony Deduction. This will almost certainly lead to smaller alimony awards with the net effect of costing the paying spouse more money.
For perspective, according to the Bloomberg article, “The GOP Tax Plan Could You’re your Divorce More Expensive,” eliminating the Alimony Deduction (the current law) will generate roughly 8 billion dollars over a decade while The Tax Cuts and Jobs Act (the proposed law) seeks to cut 1.4 trillion dollars overall.
If you have already entered into a spousal support agreement or litigated your case, do not worry – the new Act will only affect those who enter into agreements or are ordered to pay alimony after December 31, 2017. If you are currently in the process of divorce, this is an extremely important topic and change that you must understand as you move forward.
— Jennifer Harrington