People in North Carolina may be wise to consider the effects their divorce could have on tax planning. This is especially true for people with significant assets, particularly when one spouse is the primary breadwinner. Spousal support taxation will be handled differently for people who finalize their divorces after Dec. 31, 2018, due to changes included in the Tax Cuts and Jobs Act passed in late 2017.
Spousal support is often agreed upon or ordered in a high-asset divorce where one spouse substantially out-earns the other, especially when the other spouse has been a stay-at-home parent. For decades, spousal support payments have been tax deductible to the payer and taxable for the recipient. This arrangement results in an overall tax savings as taxes are paid at the income level of the lower-income person. In addition, the tax deduction created a strong incentive for the higher-earning party to agree to generous spousal support payments, often expediting divorce negotiations.
The changes coming in 2019 reverse that situation. Instead, the payer will be responsible for taxes, and the recipient will receive the income tax-free. While this could seem a boon to recipients, it is likely to lower the overall amount of spousal support and make it more difficult to achieve a resolution. As a result, many couples are hurrying to finalize their divorces before the end of 2018. Others are looking for creative options that can maximize tax savings if they need to conclude their divorce in the new year.
When people decide to divorce, the financial consequences can long outlast the emotional and practical changes. A family law attorney may advise a divorcing spouse and provide representation in negotiations. By working with a lawyer, people going through a divorce may strive for a fair settlement on issues like spousal support and property division.