The major federal tax overhaul signed into law in late 2017 will affect many different financial aspects of American life. One consequence of the bill has received little media attention but is likely to have significant implications for New Jersey divorce cases. This provision changes the tax structure of alimony payments.
As our Monmouth County divorce attorneys can explain, under the existing tax code provisions, alimony is treated as income to the recipient. This means the paying spouse may deduct alimony from his or her taxable income. The alimony is then taxed as the recipient’s income. Reuters reports this system will be ended for spousal support orders (either for separations, temporary orders during divorce litigation, or permanent orders entered at the end of a divorce case) entered after December 31, 2018. Alimony will then become tax-neutral. This means that there are no tax consequences for either side. The paying spouse does not get to deduct it and the recipient spouse need not claim it as income. This is how child support is currently treated under the tax code.
New Jersey has seen its own legislative reform of alimony laws in recent years. In 2014, Governor Chris Christie signed an alimony reform bill that enacted more stringent requirements for alimony awards. The controversial term “permanent alimony” was removed from the law altogether, and replaced with the concept of “open durational” alimony. Section 2A: 34-23 of the New Jersey Statutes also set a clear limit for the duration of alimony. But for in exceptional circumstances, alimony awards for a union which lasted 20 years or less cannot exceed the length of the marriage. For better or worse, these restrictions limited the number and amount of alimony awards in New Jersey.
The federal tax provisions will almost certainly make it more difficult for New Jersey couples to negotiate alimony settlements. Now, paying spouses will not have the benefit of a tax deduction for the payments which are made. In many cases this might be a small overall dollar value, but it is nonetheless a benefit which carries some emotional attachment. Many divorcing litigants are unhappy with paying for their former spouse’s living expenses. A tax deduction provides some small relief and incentive to negotiate terms which all parties can agree to. Without this incentive, the higher-earning spouse may be reluctant to make any offer of alimony. Whether the alimony award is negotiated between the parties or ordered by a court, it will almost certainly be lowered to account for the fact that is no longer deductible from the paying spouse’s income. This presents an immediate cash flow problem for divorcing spouses who are the lower wage earner, need time to seek an education, or cannot go back into the workforce due to the needs of their children.
Like all issues presented by a divorce, there are many solutions to alimony tax liabilities which can be tailored to a particular family’s needs. The tax liability can be apportioned between the spouses based upon their respective earning capacities. Property division can be used to offset alimony reductions, or to compensate the higher-earning spouse for his or her tax liability. Debt, too, can be redistributed between the parties to account for shifting tax obligations as a result of alimony payments. A Monmouth County divorce attorney can help divorce litigants understand and plan for their tax liabilities resulting from a divorce.
If you are dividing property as the result of a New Jersey divorce, contact the Monmouth County property division attorneys at Rozin|Golinder Law LLC by calling (732) 377-3367.
