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Changes to law may affect federal tax treatment of alimony

| Apr 8, 2020 | Firm News |

As North Carolina couples navigate issues of divorce and spousal support, they may not be aware of how tax planning considerations need to enter the discussion.

Forbes explains how the Tax Cuts and Jobs Act modifies the federal income tax treatment of alimony or spousal support arrangements finalized in 2019.

Alimony must fall within the new federal tax definition

To characterize spousal payments as alimony under the new law, the Internal Revenue Service will require that the payments meet certain conditions. These constraints dictate that the parties have a written agreement describing the payments as alimony or spousal support. In addition, the parties must live in separate households. The law further requires the paying spouse to make payments in cash or cash equivalents, and disbursements may not continue after the recipient’s death.

Child support does not fall within this definition.

Alimony is no longer taxable income

For years ending on or before December 31, 2018, spouses obligated for alimony could deduct the support payments from their taxes, and spouses receiving alimony counted funds received as taxable income. The changes in law flipped the federal tax treatment of spousal support. Starting with 2019, an alimony recipient no longer needs to report money received as income, and the party obligated for support may not treat the payments as tax-deductible.

The IRS regards a couple’s marital status as of December 31 each year as their marital status for the whole tax year. The final divorce date, and not the date of separation, is relevant to this determination.

Spousal support calculations take several variables into account. Couples who need guidance on the calculation and tax treatment of spousal support may find it useful to consult with an attorney experienced in divorce.

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