New Tax Law and Implications for Divorce
Recent changes in the tax law have been making headlines in the news. For good reason. A lot of U.S. citizens will be impacted by the new laws and since taxes are a big part of life, everyone wants to know how they will be affected.
Divorcing couples could be facing pressure to finalize their divorce sooner rather than later in effort to keep divorce settlements less heated.
Current Tax Laws Regarding Alimony Support
A provision created in 1942 is currently in place that allows payors of alimony to reduce their annual tax liability by claiming deductions on alimony payments. Ultimately, this reduces the earnings of the paying spouse and places the tax burden on the recipient. Since recipients are typically the lower wage earners in the marriage, the alimony is taxed in a lower bracket.
By eliminating the provision, the IRS is set to collect more taxes by keeping taxable income higher for the payor of alimony.
Changes to the Tax Law Affect Alimony Support Settlements
Alimony payors will now be responsible for paying taxes on alimony support as part of total income. The payor will no longer be able to adjust their tax burden by offloading funds to their former spouse.
Essentially, taxes will be paid on money from a higher tax bracket versus the lower tax bracket of the recipient.
Paying alimony was a decent deal for the payors, but now, the burden of tax payment could cause divorce alimony settlements to become more gridlocked as the higher wage earners fight to keep their taxable income.
Alimony Settlements Could become a Battleground
This can in all likelihood make negotiating alimony and other divorce settlements more contentious. There will be little incentive for divorcing spouses to play nice during negotiation. By setting up higher wage earners to pay more on money that they do not control, these alimony payors may request their divorce lawyers to play hard ball to avoid high payout settlements.
Although the burden of tax payment is reduced to recipients, it does cause concern that higher alimony payouts will become less common. This can even have ranging effects on child support, as alimony payments often include child support settlements.
How Does the Tax Law Impact North Carolina Divorces
Since North Carolina requires a year of separation before divorce, couples facing separation and divorce as of today's date are likely out of luck. However, couples who separated before December 31, 2017 have a fair chance to take advantage of the provision before it expires.
If you are separated in North Carolina, but are waiting to finalize your divorce, do not wait too long or your income could be negatively affected. Either by having to pay more in taxes as the payor or receiving less alimony as the payee, failing to finalize your divorce before January 2019 could hurt your bank account.
When Does the Alimony Provision Expire?
The new tax law eliminating the alimony provision takes effect on December 31, 2018.
Speak to a Family and Divorce Attorney in Raleigh
Moving toward divorce in the next few months or coming year can have major implications on how your income is affected. Contact our team of divorce lawyers and family attorneys about your case. We can guide you toward a positive resolution by navigating the new tax laws during your divorce.
Call 919-301-8843 or complete the contact form below.
