Taxes FAQ

North Carolina courts are permitted to award reasonable attorney’s fees in connection with an award of alimony and post-separation awards. Attorney’s fees can be awarded in an original proceeding or during an appeal process. In general, a dependent spouse will receive attorney’s fees from a supporting spouse where alimony is appropriate.

Post-separation support, alimony, and attorney’s fees can be waived if there is a valid separation agreement between you and your spouse that contains an expressed provision to waive said financial obligations. However, if the absence of such spousal support causes financial hardship in a dependent spouse as to make that spouse eligible for public assistance, the court can ignore a waiver and require spousal support via alimony, attorney’s fees, and post-separation support. In order for a judge to go against an expressed waiver of support provided in a separation agreement, the court must find dependency as well as the factors required to receive post-separation or alimony.

Dividing retirement can be a complicated process that involves tax penalties, but if the retirement plan is a qualified employ plan, such as a 401(k) or pension that receives contributions from the employer, a Qualified Domestic Relations Order can be the solution for a tax-free division. A QDRO is a legal document signed by a judge that instructs an administrator of a retirement account to separate and withdraw from the account without incurring a tax penalty. The funds withdrawn from a divided account will be placed in a new retirement account.

Spouses enjoy a unique protection that prevents them from having to report a transfer of property as a loss or gain. Any provision in a document enumerating the details of property transfers will state that the transfer is tax-free. In the absence of such a provision, there is a presumption that the transfer was as a result of a divorce and is, therefore, tax-free.

The IRS has mandated that child support payments are never taxable nor are they deductible.

If certain criteria are met, alimony is deductible by the spouse paying the alimony and reportable as income to the dependent spouse under federal and state tax laws. The alimony payments must be in cash and not in-kind, and the payments must be made in connection to a divorce or a separation agreement. Also, the parties must not have designated the payments as non-alimony payments, the parties cannot be living in the same household, and the payor cannot be obligated to make payments after the death of the dependent spouse.

You and your spouse may privately agree that the tax consequences or benefits of alimony shall not apply. However, if by private stipulation, you create alimony payments that do not meet the above stated criteria, the paying spouse may not later try to obtain a tax deduction for the alimony payments. In some circumstances, a paying spouse may later be required to relinquish that deduction and include, as income, a portion of the alimony previously paid. This result can occur when the IRS believes that spouses are attempting to disguise property settlements as alimony payments in order to receive a more favorable tax treatment.

Similarly, spouses should be aware of the recapture rule. Under this rule, a spouse paying alimony will be required to recapture any excess alimony paid during the first three years of separation. The three-year time period begins when the paying spouse begins paying alimony.

The formula for the recapture rule is extremely complex. In general, if the amount of alimony paid in year three, plus $15,000, is less than the amount of alimony paid in year two, the excess will be recaptured. In addition, if a comparison of the first year’s payment to the average of payments made in years two and three show that the average of years two and three, plus $15,000, is less than the amount paid in year one, the excess amount will again be recaptured.

The spouse who paid the excess amount would then have to include that amount in his or her income and pay taxes on it. The spouse receiving the excess amount would get to take a corresponding deduction. This tricky tax pitfall catches many divorcees off-guard and should be discussed with an attorney and a tax advisor.

The alimony recapture rule only applies to the paying spouse when alimony payments decrease substantially or end during the first three calendar years. This rule is intended to prevent payors whose divorces occur near the end of the year from making deductible property settlements at the beginning of the year.

Under the recapture rule, a spouse paying alimony will be required to recapture any excess alimony paid during the first three years of separation. The three-year time period begins when the paying spouse begins paying alimony.

The formula for the recapture rule is extremely complex. In general, if the amount of alimony paid in year three, plus $15,000, is less than the amount of alimony paid in year two, the excess will be recaptured. In addition, if a comparison of the first year’s payment to the average of payments made in years two and three show that the average of years two and three, plus $15,000, is less than the amount paid in year one, the excess amount will again be recaptured.

The spouse who paid the excess amount would then have to include that amount in his or her income and pay taxes on it. The spouse receiving the excess amount would get to take a corresponding deduction.