Is Alimony Taxable in North Carolina?

The taxability of alimony in North Carolina is tied to federal tax law, where the date of your divorce or separation agreement is the most important factor. Whether payments are considered income to the recipient or a deduction for the payer depends on when the legal agreement was finalized. This date determines which set of tax rules applies for the entire duration of the payments.

Federal and North Carolina Alimony Tax Rules

The Tax Cuts and Jobs Act of 2017 (TCJA) changed federal alimony taxation. North Carolina’s state income tax system conforms to these federal rules, meaning the tax treatment at the state level mirrors federal regulations. The tax implications are split into two distinct timelines based on when a divorce or separation instrument was executed.

For any divorce or separation agreement executed on or before December 31, 2018, the traditional tax rules remain in effect. The spouse making the alimony payments can deduct the full amount from their income, lowering their tax liability. Consequently, the spouse receiving the payments must report that alimony as taxable income on both their federal and North Carolina tax returns.

For all agreements executed on or after January 1, 2019, the TCJA reversed the rules. Alimony payments are no longer deductible by the paying spouse. The recipient of the alimony does not include the payments in their gross income, meaning the money is received tax-free. This change treats alimony similarly to child support, which is non-deductible for the payer and non-taxable for the recipient.

For example, under the old rules, a payer in a 24% federal tax bracket who paid $20,000 in alimony annually could receive a $4,800 tax deduction. The recipient, perhaps in a 12% tax bracket, would owe $2,400 in taxes on that income. Under the new rules applicable to post-2018 agreements, the payer gets no deduction, and the recipient owes no tax.

Defining Alimony for Tax Purposes

For a payment to be treated as alimony under the pre-2019 rules, it must meet seven requirements outlined by the Internal Revenue Service (IRS). Failure to meet even one of these conditions can result in the IRS reclassifying the payments, altering the tax consequences for both parties.

• Payments must be made in cash, including checks or money orders, to or on behalf of a spouse or former spouse.
• Payments are required under a divorce or separation instrument, such as a decree or written agreement.
• The instrument cannot designate the payment as something other than alimony.
• Spouses who are legally separated cannot be members of the same household when the payment is made.
• There is no liability to make any payment for any period after the death of the recipient spouse.
• The payments cannot be fixed as child support.
• The spouses cannot file a joint tax return for the year the payment is made.

It is also important to understand what is not considered alimony. The following do not qualify:

• Child support payments.
• Non-cash property settlements, such as transferring ownership of a house or car.
• Payments that are a spouse’s share of marital property.
• Voluntary payments not required by a legal instrument.
• Payments made to keep up the payer’s property.

Modifying Pre-2019 Divorce Agreements

If a pre-2019 agreement is modified after 2018, the original tax treatment generally continues to apply. Changing the payment amount or duration does not automatically subject the agreement to the new, post-TCJA rules.

However, if a pre-2019 agreement is modified, the parties can choose to have the new tax rules apply. For this to happen, the modification document must explicitly state that the alimony payments are not deductible by the payer and are not to be included in the recipient’s income. This language opts the modified agreement into the new tax regime.