Some big changes are coming to the way spousal support is taxed thanks to the Tax Cuts and Jobs Act. For divorce and separation agreements executed in 2019 and beyond, North Carolina recipients will receive alimony tax free while payers will no longer be allowed to deduct payments. This reverses the current taxation standard for alimony that’s been in place for more than 70 years. Divorces completed before 2019 will not be affected.
While the change in the law will lower the amount of alimony paid to recipients in some scenarios, it does provide some advantages to couples who plan ahead using tax-deferred IRAs and 401(k)s. Alimony recipients may have less ability to create tax-sheltered savings themselves, but they can receive account balances through settlements. By circumventing traditional cash payments, a lot of tax saving opportunities can be realized.
This type of arrangement is designed to benefit both parties. The payer of alimony is able to transfer assets to the recipient pre-tax and will never have to pay taxes on the withdrawal. The recipient can then withdrawal from this account at a lower tax rate, effectively reversing the change that was made to the tax code. Recipients who need to take out money from an account too early may be subject to penalties.
Both parties in a divorce case are advised to get representation from an attorney regardless of any alimony planning that took place in the past. In many divorces, previous financial arrangements get ignored for various reasons. It’s the responsibility of an attorney to protect the financial interests of their client whether they are the giver or receiver of alimony.