Effects of the Tax Act on New Jersey Divorces

The Tax Cuts and Jobs Act (“Tax Act”) passed in late 2017 affects millions of Americans in a variety of ways, some fairly obvious and some more subtle or unexpected. A lesser-known provision that just went into effect as of January 1, 2019 affects how alimony payments are treated under the tax laws. The new calculation of taxes based on alimony payments has the potential to significantly affect divorce negotiations surrounding alimony and child support. Read on for how the Tax Act might affect your divorce, and reach out to a knowledgeable New Jersey alimony lawyer with any questions about an existing or potential divorce.

The Tax Act Changes Whether and How Alimony Payments Are Deducted

Many divorces result in some form of alimony being either ordered by the court or agreed-upon in a final settlement. Before the passage of the Tax Act, payments that met the federal tax law definition of alimony could always be deducted by the payer for income tax purposes. Recipients of alimony payments, in turn, always had to report alimony as taxable income. This created a tax incentive for the wealthier spouse in a divorce to agree to alimony payments. For any divorce before 2019, this remains the law. For divorces effected 2019 and beyond, however, the rules have changed.

For any alimony payments required under divorce or other separation instructions executed after December 31, 2018, the Tax Act eliminates the tax deduction for the payer. In turn, the recipients of alimony no longer have to report alimony as taxable income. The new rule applies to new divorces, as well as to divorces that are modified after 2018 that specifically incorporate the new deduction rules under the Tax Act. Couples who might otherwise benefit from a restructured alimony may instead choose to keep the existing arrangement in order to retain the favorable tax treatment.

How the New Alimony Deduction Rules Might Affect Your Divorce

The tax deductions for alimony payments were often substantial. Alimony is often expressed as a percentage of total income, and the deduction allowed payers to effectively drop to lower tax brackets by deducting the alimony payments from their income. Without the tax deduction, alimony has suddenly become a much more expensive proposition. Wealthier spouses in a divorce proceeding now have a much stronger incentive to fight tooth and nail against paying alimony, or for lowering the amount of alimony owed, to avoid the significantly increased cost. This can add months of contentious negotiations to divorce proceedings that might otherwise have been easier to facilitate.

Spouses negotiating a divorce may want to consider alternatives to traditional alimony in order to account for the new tax treatment. Lump-sum payments or buyouts may be more attractive options that allow both spouses financial security without breaking the bank quite as much over time.

If you are considering divorce or are seeking to modify the terms of an existing divorce and need experienced legal help evaluating and resolving all of the related issues, contact the skilled and effective New Jersey family law attorney John B. D’Alessandro for a consultation on your case, in Union at 908-964-0102.