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The Impact of 2018 Tax Code Changes on Alimony

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From the moment the bill came to public light up until when it was passed into law, the Tax Cuts and Jobs Act (TCJA) has taken many residents of North Carolina by surprise. This due to the uncertainties and confusions caused by the tax code changes for 2018 and beyond.

The new Tax Cuts and Jobs Act, which was signed into law in December 2017, will greatly affect alimony going forward because the payer will no longer be able to make tax savings on such payments. This article aims to explain the impact of the federal Tax Code changes on alimony, especially in terms of tax deductions.

What’s the change and who’s affected?

With regards to alimony, the new tax code change repeals a 75 year old law that allowed the payor of alimony to make tax deductions on their alimony payments, thereby making it more affordable for them and also helping them save on taxes in their personal income.  

For instance, an ex-spouse who would have paid $30,000 in alimony payments could deduct around $9,900 from it using the Federal Tax rate of 33% while the receiving spouse can also declare the alimony received as taxable income and pay taxes on it.

In summary, the new changes are as follows:

  1. There will be no more alimony deductions for payers for alimony agreements or alimony, subject to the effective date rules of the new Alimony Statute.
  2. Payees will not report alimony as income if the agreement or court order for alimony is entered into after the effective date of the new Alimony Statute, subject to the effective date criteria of the new Alimony Statute.
  3. Effective date: The amendments made by this section shall apply to—
  1. any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018, and
  2. any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.

These changes essentially apply to new agreements entered in the year 2019 and on, so if you’re already legally divorced or separated and in the process of entering an alimony agreement, this shouldn’t apply to you. Be aware, however, that if you modify your alimony agreement, you may be subject to the new rule.

What do the changes to the tax code mean for my alimony payments?

If you’re already receiving alimony then this doesn’t apply to you. The repeal is only effective for any divorce or separation instruments:

  • executed after Dec. 31, 2018
  • executed before Jan.1, 2019, and modified after 2018 provided the modification expressly provides that the repeal of the qualified alimony and separate maintenance rules of the Internal Revenue Code apply

Will old agreements or court orders be upheld?

All old agreements will remain valid and continue to be upheld by the IRS in terms of tax deductions.  However, subsequent modifications to existing alimony arrangements may mean that the parties involved are electing to enter comply with the TCJA rules.

Old vs New Alimony Law, which is better?

The old alimony law allowed a spouse who earns $120,000 per year and pays $30,000 annually to their spouse who earns $25,000 annually to only pay taxes on his remaining $90,000 wages. The wife was also required to pay taxes on her combined $55,000 income.

However, under this new alimony statute, a similar spouse would be required to pay taxes on his entire $120,000 earnings regardless of his $30,000 alimony payment. The receiving spouse in turn would only need to pay taxes on her $25,000 earnings.

Although it may appear that this new law will benefit ex-spouses who receive alimony, it’s not so straightforward as it could end up hurting both parties. Payers in the past would have offered more in alimony knowing that they were tax deductible but with this new rule, they are likely to offer less because of the tax constraints it would impose on them. The overall winner from this change is the IRS, who will essentially charge the highest earner among both parties at the higher marginal rate.

North Carolina Judges may also be forced to award less in alimony as the change in the tax law will certainly affect the supporting spouses’ ability to pay. However, judges still have a wide discretion at their disposal in determining what to award for alimony payments so the tax code change is not a deciding factor.

Final Thoughts

The changes brought about by the Tax Cuts and Jobs act will certainly make divorce negotiations in North Carolina and elsewhere a lot harder, especially with regards to discussions surrounding alimony and support payments. Although it is difficult to pinpoint which party this new rule will favor most because of circumstantial differences, the bottom line is that it may mean the payer will offer less in alimony, as they will not be able to make any tax deductions.

If you need to speak to someone regarding how these changes will directly affect you, you can contact your attorney or get in touch with us directly on our Forum.


 

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