Divorce, Alimony, & Taxes: The Details

Russell Family Law & Litigation • October 26, 2020

Understanding the Basics of Divorce, Alimony and Taxes

Woman watching child play at the beach
Are you going through a divorce that involves alimony payment? If so, you should know that there are serious tax implications to consider and your divorce attorney can help you navigate these issues. It is essential that you are familiar with them, as they might play a key part in your negotiations. In this article, we will cover the terms and rules you need to know regarding alimony and taxes. Read this before signing anything related to alimony during your divorce process.

Know Your Terms

To begin with, alimony has a very specific meaning — it is the sum of money one spouse provides to the other as support after a divorce. No two alimony settlements are exactly the same, as there are many factors the court will consider. In North Carolina, for example, there are no regulations regarding alimony. There are no rules as to how much a spouse should receive or how long the payments must continue. It is all decided during the negotiations, so you need to be careful about what you are agreeing to.


In addition to alimony, the term has several different names you are likely to encounter. Those include maintenance, spousal support, and financial support. Keep in mind that no matter the term found in your separation agreement, you will be required to pay taxes on alimony. Support payments result in taxes regardless of the way they are named.


Alimony Taxes for the Paying Spouse

Before 2019, people who were paying alimony were able to deduct it from their taxes. However, this is no longer the case — if your divorce was concluded after 01/01/2019, you must pay taxes based on your entire income. If it took place before that date, alimony payments should still be tax-deductible for you.


You need to be careful not to amass a huge tax bill when filing at the appropriate time. One way to avoid that is to pay your taxes on a quarterly basis. This way, you will spare yourself any unpleasant surprises.


Also, make sure you do not skip alimony payments. If a court orders you to pay arrearage, it might come with an added interest that will make the bill considerable — and you will not be able to deduct it from your taxes.


Does the Receiving Spouse Pay Alimony Taxes?

Since taxes on alimony are the responsibility of the spouse who pays it, the receiving spouse is not subject to any taxation. Alimony payments are not regarded as taxable income any longer. However, the situation was different before 2018 — you had to pay a 10%–30% tax on any alimony you receive, just as you would do for your salary.


As the receiving side, you need to be aware of how paying alimony and the taxes involved will affect the other side. Keep in mind that alimony payments are not tax-deductible for the paying spouse anymore, so they will end up paying every dollar owed in taxes. If you want your alimony payments to be consistent, make sure you agree upon a sum that your ex-spouse will be able to handle.


For example, if you want $1,500 in alimony per month after the divorce, make sure your soon-to-be ex-spouse knows that they will have to set aside around $375 for taxes (assuming they are taxed at a rate of 25%).



The Recapture Rule

When it comes to discussing alimony payments, you must always keep in mind the so-called “recapture rule.” It comes into effect if the payments experience a “substantial decrease” or simply stop in the first three years after your divorce. So, what does substantial decrease mean and when can it be argued?


You can argue a substantial decrease in two specific cases. In the first one, the total alimony payments received for the third year plus $15,000 must be less than the alimony paid for the previous year. In the second case, the average alimony paid for the second and third year must be less than the total paid during the first year. If one of the two situations occurs, the recapture rule applies.


The recapture rule makes the paying spouse pay back the IRS any tax benefits that were improperly taken during the first two years after the divorce. In addition, any deductions must also be recaptured after the third calendar year post-divorce has passed.


Alimony and Mortgage Payments

If you and your spouse own a residence and only one of you will be paying the mortgage for it, there are some more tax implications to consider. If the paying spouse agrees to pay the mortgage while the receiving spouse still lives in the residence, then the mortgage payment is technically also an alimony payment, no matter whose name is on the deed to the house.


For example, even if you own the house and keep on paying the mortgage, if you move out and decide to let your ex-spouse live there, your payments are essentially alimony.


Alimony Trusts

When discussing alimony, the receiving spouse should make sure payments are regular and will not suddenly stop because of an unexpected issue. There should be a safeguard in case the paying side cannot afford to pay. In order to achieve that,the paying spouse can set up an alimony trust by offering property or an income-producing asset. The purpose of the trust is to cover the alimony payments in case something unexpected occurs. After all, the paying spouse could go bankrupt, become unable to work, or pass away — in such cases, the alimony trust helps the receiving spouse keep on getting the necessary financial support.


As pointed out, an alimony trust can be beneficial for the receiving spouse in several situations.


Such a trust should be up for discussion depending on the occupation, health, and current situation of the supporting spouse. For example, if the paying spouse has an unstable job or exhibits reckless spending behavior, insisting on an alimony trust is the wisest possible decision. Similarly, if the paying spouse is in poor health, establishing an alimony trust would protect the receiving spouse. Similarly, a trust protects the receiving spouse if there are any suspicions that the paying spouse would quit their job in order to avoid paying alimony.


When it comes to taxes on alimony trusts, the IRS has taken special care of such situations. If you transfer property into an alimony trust, you do not have to pay any taxes on it. That includes the usual “gift tax” that would usually apply for such actions. However, it’s important to remember that this exception exists only if you establish the trust as part of a divorce agreement.


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How are 529 Plans Handled in Divorce?

March 24, 2025
A 529 Plan, which owes its name to Section 529 of the Internal Revenue Code, is a tax-advantaged savings account that is designed to be used for the education expenses of the beneficiary. It is very common that parents create such an account to save for their child’s college education. So, what happens to such an account when the parents decide to divorce? 529 Plans , like other savings and investment accounts, are property. As such, in North Carolina, 529 Plans are dealt with during equitable distribution proceedings. During such a proceeding, the court will classify the parties’ property as one of three categories – marital, divisible, and separate – and then distribute the marital and divisible property among the parties. Thus, the treatment of the 529 Plan will depend upon how the plan is classified. N.C. Gen. Stat. 50-20 defines marital, separate, and divisible property as follows: Marital Property : “all real and personal property acquired by either spouse or both spouses during the course of the marriage and before the date of the separation of the parties, and presently owned, except property determined to be separate property or divisible property.” Separate Property : “all real and personal property acquired by a spouse before marriage or acquired by a spouse by devise, descent, or gift during the course of the marriage. However, property acquired by gift from the other spouse during the course of the marriage shall be considered separate property only if such an intention is stated in the conveyance. Property acquired in exchange for separate property shall remain separate property regardless of whether the title is in the name of the husband or wife or both and shall not be considered to be marital property unless a contrary intention is expressly stated in the conveyance. The increase in value of separate property and the income derived from separate property shall be considered separate property. All professional licenses and business licenses which would terminate on transfer shall be considered separate property.” Divisible Property : “all real and personal property as set forth below: All appreciation and diminution in value of marital property and divisible property of the parties occurring after the date of separation and prior to the date of distribution, except that appreciation or diminution in value which is the result of postseparation actions or activities of a spouse shall not be treated as divisible property. All property, property rights, or any portion thereof received after the date of separation but before the date of distribution that was acquired as a result of the efforts of either spouse during the marriage and before the date of separation, including, but not limited to, commissions, bonuses, and contractual rights. Passive income from marital property received after the date of separation, including, but not limited to, interest and dividends. Passive increases and passive decreases in marital debt and financing charges and interest related to marital debt.” Given these definitions, the classification and distribution of a 529 Plan will depend upon how and when it is created and funded. What is most important to note is that the court will not award the 529 Plan to the child, as the child is not a party to their parents’ divorce. Further, while the court may consider the purpose of the 529 Plan when making an “equitable” distribution of the parties’ property, the court will not totally disregard the value of the 529 Plan when distributing property among the parties simply because it is intended for the benefit of their child. However, the parties may take such considerations into account when negotiating a potential settlement between one another. If you are considering divorce or engaged in, or anticipate being engaged in, an equitable distribution proceeding, call our office today to schedule a consultation with an experienced family law attorney.

Do North Carolina Courts Consider Marital Misconduct?

February 26, 2025
North Carolina is considered to be a “no-fault” divorce state, meaning that a couple need not show cause or some wrongdoing in order to obtain a divorce. However, marital misconduct does play a role with regard to the issue of alimony in North Carolina. In determining the amount, duration, and manner of payment of alimony, the Court must consider a variety of factors as laid out in N.C. Gen. Stat. § 50-16.3A(b). This statute lists 16 factors which the court will consider when determining the issue of alimony . One of the most often discussed and litigated of these factors is marital misconduct. N.C. Gen. Stat. § 50-16.1A defines marital misconduct as follows: ‘Marital misconduct’ means any of the following acts that occur during the marriage and prior to or on the date of separation: Illicit sexual behavior. For the purpose of this section, illicit sexual behavior means acts of sexual or deviate sexual intercourse, deviate sexual acts, or sexual acts defined in G.S. 14-27.20(4), voluntarily engaged in by a spouse with someone other than the other spouse; Involuntary separation of the spouses in consequence of a criminal act committed prior to the proceeding in which alimony is sought; Abandonment of the other spouse; Malicious turning out-of-doors of the other spouse; Cruel or barbarous treatment endangering the life of the other spouse; Indignities rendering the condition of the other spouse intolerable and life burdensome; Reckless spending of the income of either party, or the destruction, waste, diversion, or concealment of assets; Excessive use of alcohol or drugs so as to render the condition of the other spouse intolerable and life burdensome; Willful failure to provide necessary subsistence according to one's means and condition so as to render the condition of the other spouse intolerable and life burdensome.

Navigating Holiday Stress During Divorce: Tips for Families

December 5, 2024
The holiday season is a time traditionally associated with joy, togetherness, and celebration. However, for families going through a divorce, it can also be a time of heightened stress and emotional challenges. Managing these stressors effectively can help everyone involved – especially children – navigate this season with as much peace and stability as possible. Here are some common holiday stressors families experience during a divorce and practical strategies to address them: 1. Financial Pressures Divorce often brings financial changes that can make the holidays feel especially strained. Gift-giving, travel, and hosting events can add up quickly. Solution: Set a Budget: Be realistic about what you can afford this year. Focus on creating meaningful experiences rather than overextending financially. Free/low-cost experiences could include going to a holiday parade, going for a walk downtown or a drive around town to view the holiday lights, or taking the kids to the local mall or a store to visit Santa (or even the Grinch at some locations, such as the Cotton Exchange). Communicate with Co-Parent: Discuss gift budgets and avoid competitive or extravagant gift-giving, as this can create tension or unrealistic expectations for the children. 2. Emotional Strain on Children Holidays can amplify a child’s sense of loss or confusion about their family dynamics, especially if traditions are changing. Solution: Prioritize Consistency: Whenever possible, maintain familiar traditions to provide a sense of stability. Introduce new traditions as a way to create positive memories in this new chapter. Open Communication: Reassure your children that it’s okay to express their feelings and let them know both parents are committed to making the holidays special for them. 3. Loneliness or Isolation For people going through a divorce, the first holiday following separation can feel especially lonely and isolating. It’s normal to grieve the loss of how things used to be. Solution: Lean on Support Systems: Spend time with friends, family, or community groups that provide comfort and connection. Focus on Self-Care: Use this time to rest, reflect, and engage in activities that bring you joy and relaxation. 4. Co-Parenting Tensions The holidays can sometimes exacerbate underlying tensions between co-parents, particularly if communication is strained or agreements are unclear. Solution: Keep Communication Businesslike: Focus on logistics rather than rehashing old conflicts. Tools like co-parenting apps, such as Our Family Wizard or Talking Parents, can help keep interactions clear and professional. Put the Children First: Decisions should always prioritize what’s best for the children, even if it requires compromise. 5. Managing Extended Family Expectations Extended family members may have their own opinions or pressures about how holidays “should” look, which can complicate matters further and exacerbate holiday stress. Solution: Set Boundaries: Be clear with family members about your plans and priorities. Gently but firmly remind them that the focus is on creating a positive experience for your immediate family and avoiding negative talk about the other party or your current situation. Include Supportive Relatives: If possible, involve family members who can help diffuse stress and provide stability during this transitional time. If you are going through a divorce this holiday season and need legal representation, please contact our office to set a consultation with one of our family law attorneys.
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What Should Parents Know about Child Custody in North Carolina?

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Navigating child custody arrangements can be one of the most challenging aspects of a separation or divorce. In North Carolina, the legal framework for child custody is designed to prioritize the best interests of the child, but understanding the different types of custody arrangements can be complex. This guide aims to shed light on the types of child custody in North Carolina, helping parents make informed decisions.

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Co-parenting

July 19, 2024
Co-parenting is crucial to ensure that children continue to receive the love, support, and guidance they need from both parents despite the parents’ separation or divorce. By working together, parents can create a stable and nurturing environment that fosters the emotional and psychological well-being of their children. Effective co-parenting helps children adjust to change, reduces feelings of insecurity, and promotes healthy development. It also models positive conflict resolution and cooperation, providing a strong foundation for children’s future relationships. Ultimately, co-parenting prioritizes the best interests of the children, helping them thrive despite the family restructuring. Successful co-parenting after separation or divorce requires open communication, mutual respect, and a focus on the well-being of the parties’ children. To best ensure the success of a co-parenting relationship, it is crucial to keep discussions child-focused, and avoid negative talk about the other parent in front of the children. Flexibility and willingness to compromise are key, as well as seeking professional help if conflicts arise that cannot be resolved independently. Prioritizing the children’s emotional and physical needs will help ensure a positive co-parenting experience. Here is a list of ideas for potential resources that may help co-parents manage and support their children’s well-being while navigating the changing family structure:  Books for Children Age-appropriate books explaining separation and divorce Stories that help children understand and cope with their feelings Therapists and Counselors Child psychologists for children’s emotional and mental health Family therapists specializing in co-parenting dynamics Support Groups for Children Peer support groups for children of divorced parents In-person and online groups providing a safe space for children to share their experiences School counselors and social workers providing support and guidance Mobile Apps Apps designed to help children understand and manage their emotions Co-parenting apps with features to ensure both parents stay informed about their child’s activities and needs Books and Guides for Parents Manuals on how to support children through the transition Guides focusing on effective communication with children post-separation Guides focusing on effective communication with your child’s other parent Podcasts and Videos Podcasts offering advice on supporting children’s mental health during divorce YouTube channels with content aimed at helping children cope with family changes
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Even if both spouses have each other’s best interests at heart, the separation process is rarely smooth. To avoid conflicts, sign a separation agreement.
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Although the parties can choose to settle the child support issue without consulting a lawyer, it’s usually advisable to seek an expert’s assistance to protect the child’s interests.
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Pet custody battles can get as heated as the ones for children, and even more so. That’s because the parties often have to come to an agreement on their own.
Woman handing a wedding right back to her ex husband over divorce papers

Getting a Divorce During a Recession

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Divorce rates decline during economic hardships. But why does a recession affect divorce at all? And what does it mean for cases where separation is inevitable?
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