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

Alimony is money paid by one former spouse to support the other after a divorce. It is intended to represent the continuing obligation of one spouse who had formerly supported the other while the two were married, despite the end of the marriage. Pursuant to North Carolina statute, a court is to consider sixteen factors, which are listed within the provision, when determining the amount and duration of alimony to award in a divorce proceeding.

The statute provides in part that, in determining the amount, duration, and manner of payment of alimony, a court shall consider all relevant factors, including the federal, state, and local tax ramifications of the alimony award. The statute further directs the court to make specific findings of fact on each of the factors if evidence is offered on that factor.

The tax ramifications factor for alimony authorizes the court to consider the different impacts of an award for parties in different tax brackets, or the impact of ordering a transfer of appreciated property as alimony if the depended upon spouse will be liable for capital gain on the property upon sale, or the taxes on the marital home conveyed as alimony. The bottom line is that in determining an alimony award, the court must be mindful of the potential impact a party may experience. The weight the court chooses to place on this factor is completely within their discretion. As a result, if a party wishes the court to place greater weight on the tax ramifications factor of an alimony award, they must present evidence on the fact.

By presenting evidence on the tax ramifications factor, the court is subsequently required by law to make specific findings of fact on it. While the presentation of such evidence does not necessarily require the court to increase or decrease its alimony award, the statute does mandate the court to support its reasoning with specific findings of fact. Thus, 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.

In 2017, the United States Congress signed into law the Tax Cuts and Jobs Act. The bill affects only alimony payments pursuant to 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.

Prior to 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 personal 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 potentially paying taxes on it. This shift of the tax burden has now been eliminated by the Tax Cuts and Jobs Act.

The Tax bill drastically changes the alimony tax deduction rule by shifting the responsibility of paying taxes on alimony to the supporting spouse. In addition, 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.

Individuals that have undergone a divorce prior to 2017 that involved an alimony award may now be subject to the new rules if the alimony award originally ordered is modified. So, an individual that got a divorce in 2017 that required them to pay alimony, but now, in 2020, modifies the alimony payment due to a change of circumstances, may no longer be able to deduct the alimony payments.

If you are in need of legal advice concerning the tax ramifications associated with your divorce, contact Arnold & Smith, PLLC, today. Our experienced family law divorce attorneys will walk you through the process and provide you with quality legal service. Call our office at 704.370.2828 or fill out our contact form online to schedule an initial consultation with one of our skilled family law divorce attorneys to discuss your legal options. Now taking cases throughout North Carolina with offices in Charlotte, Lake Norman, and Union County.