Alimony tax changes could affect retirement as well

For people in North Carolina who will finalize their divorces in 2019, the impact of the new spousal support tax rules could have more far-reaching effects than they realize. The Tax Cuts and Jobs Act, passed in December 2017, put in place a significant change in how taxes will be handled in relation to alimony payments for all people who finalize their divorces after 2018 comes to an end. The changes have pushed many people to move to finalize their marital splits before the end of the year in order to retain their eligibility for the existing system.

Under the changed procedures, the payer of alimony will no longer be able to deduct the payments from his or her taxes. In the past, this deduction provided a significant impetus to encourage more generous spousal support payments while providing a tax benefit, especially for wealthy couples going through a high-asset divorce. In addition, the recipient of alimony will no longer need to pay taxes on the funds.

The changes could affect more than just people’s annual tax returns, however. Retirement funds can also be impacted by the changes. For example, a payer may be able to use his or her IRA to pay alimony without a tax penalty. This could help the paying party to reduce some of the negative effects of the loss of the tax deduction. In addition, recipients will no longer be able to put their regular payments in an IRA or other tax-favored retirement fund as they no longer qualify as taxable income.

Dealing with the financial consequences of divorce can always be complicated, but this is especially true when combined with tax reform changes. A family law attorney may help a divorcing spouse to protect key assets and achieve a fair settlement on issues including alimony and property division.