Deep within the text of the Tax Cuts and Jobs Act of 2017 (TCJA) are two provisions that will have a significant effect on both alimony and child support.
If you are already paying or receiving alimony, the changes contained in the TCJA will not affect you. Even if the provisions in your alimony agreement or court order are subsequently modified, the tax treatment that existed when your agreement was first made, or order first entered, will still apply.
However, if you do not presently have an agreement or order establishing the payment of alimony, the TCJA will substantially change the tax treatment of such payments for all agreements made, or orders entered, as of January 1, 2019. Under current law, the spouse paying alimony is entitled to an above-the-line tax deduction for all such payments. The party receiving alimony is required to report all such payments as taxable income, no different from income earned from a job. Child support, in contrast, is not currently considered taxable income to the party receiving it and is not deductible by the party paying it.
As of January 1, 2019, alimony will be treated just like child support. Therefore, for all agreements made or orders entered from that date forward, the party paying alimony will not be able to deduct any alimony payments on his/her tax return. The party receiving alimony will not declare the alimony payments as taxable income.
While this may seem like a significant victory for spouses who receive alimony, it is not. That is because spouses who in the past had agreed to make alimony payments to their ex-spouses did so knowing that they would be able to deduct 100% of those payments from their taxable income. That provided a significant incentive to agree to make alimony payments, in lieu of fighting alimony claims in court. And because many spouses who received alimony payments did not have sufficient income—even after receipt of such payments—to owe any taxes, those spouses were not negatively affected by the requirement that they report their receipt of alimony payments as income.
Thus, the race is on for separating couples to resolve alimony claims prior to January 1, 2019. If they can do so, the paying party will still be able to deduct all alimony payments they make for however long they are made (with the receiving party declaring every payment received as taxable income). If alimony claims are not resolved before January 1, the party paying alimony will never be able to deduct even the first penny paid in alimony (and the receiving party will never declare such payments as taxable income).
The TCJA eliminated personal/dependent exemptions for federal taxes. Period. They no longer exist. This is significant both for existing agreements/orders to pay child support, as well as future agreements and orders.
Many existing agreements and orders contain provisions establishing which parent may declare the minor children as personal/dependent exemptions on their tax returns. The IRS had always permitted parents to negotiate between themselves who would be entitled to declare these exemptions—so long as both did not. A large percentage of child support agreements and orders contain such a provision—often the product of negotiation of the broader child support issues between the parties. And the IRS published rules each year to address, as between parents, who could claim the minor children as dependents.
As of January 1, 2018, those provisions are now meaningless. That is because, commencing January 1, 2018, personal exemptions no longer exist for federal taxation. Thus, from the 2018 tax year forward, neither parent will be able to declare any children as exemptions on their federal tax returns, irrespective of what their agreement or order might say. The IRS will no longer publish rules about who may declare the children as exemptions in the absence of an agreement or order.
As of this writing, the North Carolina General Assembly has not yet changed North Carolina tax law to match the elimination of personal/dependent exemptions in the federal tax code. Thus, presumably, parties who have such provisions in their existing agreements or orders will still be able to claim their children as personal/dependent exemptions on their state tax returns (at least until the General Assembly eliminates the state personal/dependent exemptions).
Going forward, with the exception of the lingering state tax deduction, personal/dependent exemptions will no longer be the subject of negotiation between parents in the child support arena. There is no race to the finish line on this one—Congress took care of that without so much as a warning!