In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), enacting sweeping changes to the Tax Code. These changes affect businesses and individuals on many levels, one of which is the tax treatment of spousal support (commonly referred to as alimony). If you are divorced, in the midst of a divorce, or contemplating a divorce, you need to know how the new tax law affects spousal support.
Spousal support in North Dakota is determined according to the Ruff-Fischer guidelines, which also govern property division. Named after two North Dakota Supreme Court cases, Ruff v. Ruff and Fischer v. Fischer, these guidelines consist of the factors North Dakota courts must analyze in order to award spousal support.
In addition to the Ruff-Fischer guidelines, one of the things that has also historically been a consideration in reaching agreement is that alimony was deductible as an expense to the payer, and countable as income for tax purposes to the recipient.
In other words, if A earned $100,000 per year from work and B earned $30,000, and A paid alimony to B of $20,000 per year, A's taxable income (ignoring other deductions) would be $80,000, and B's would be $50,000.
Effective January 1, 2019, under the TCJA, spousal support is no longer deductible from income by the party paying it. Likewise, the party receiving spousal support will not have to count those payments as income. To continue the scenario above, if A and B's divorce decree is signed by the judge on December 30, 2018, alimony will still be deductible to A and chargeable to B as income.
However, if their divorce decree is signed by the judge on January 2, 2019, A will be paying taxes on $100,000 in income, and B on $30,000. This is a significant benefit to B, of course, but it's a blow to A, who now must pay income taxes on $20,000 of income that went straight into B's pocket.
As 2018 draws to a close, parties who expect to be paying spousal support may be highly motivated to reach a divorce settlement agreement in order to ensure that they will still be able to deduct those payments on their tax returns going forward. Does it make sense to agree to a more generous spousal support payment than you might have otherwise, just to conclude your divorce in 2018 and receive favorable tax treatment of the alimony payments you make? Possibly—but that is a risky gambit, for multiple reasons.
If you are thinking of offering a generous payment now, and trying to modify it downward later, you are likely to be disappointed. While North Dakota courts have the authority to modify a spousal support award if either party requests it, modifications are not readily granted. The party requesting the change must show a change in circumstances significant enough to warrant an adjustment of the payment amount, such as an involuntary job loss on the part of the payer, or a large increase in income on the recipient's part. So you should not assume that you can offer a large support award now with the intention of getting it reduced later.
Even if you are granted a reduction in spousal support payments after January 1, 2019, the new tax laws may still apply, despite the fact that your original divorce decree was entered in 2018 or earlier. If the modification specifies that the TCJA treatment of alimony payments applies, no amount of the (now-reduced) spousal support payment is deductible to you if you are the payer. However, if you are the recipient, there is a silver lining to the modification: while your alimony payment is reduced, you do not have to pay tax on any portion of it.
If you have questions about how the Tax Cuts and Jobs Act will affect you or your divorce settlement's spousal support provisions, we invite you to contact our law firm.
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