Alimony and Taxation Are Changing for 2019
Over the years, many people in New Jersey have become familiar with the treatment of spousal support in annual income taxes; in fact, roughly 25,000 divorced spouses pay alimony in New Jersey. Since alimony became a common element in many divorces, payments have always been deductible by the payer and taxable to the recipient. However, after the end of 2018, many of these traditional options will change for couples beginning the divorce process.
Spousal Support and Tax Reform Laws
While changes to corporate and individual tax rates have been frequently discussed in relation to the Tax Cuts and Jobs Act, signed into law by President Donald Trump in December 2017, few may realize that alimony is specifically affected by the legislation. Both the recipient and the payer are affected by this legislative change. The changes will apply to all divorces or separation agreements finalized on January 1, 2019, or later.
Spousal support payments have long been tax-deductible for the payer. The paying former spouse could deduct alimony payments directly from gross income, resulting in significant tax savings, especially if the payer had a relatively high income and significant assets. In exchange, the recipient would pay taxes on the income in his or her own tax bracket, which was usually lower. This arrangement resulted in a lower amount of taxes being paid and could also encourage a generous agreement on spousal support.
Alimony Payments No Longer Tax-Deductible
However, under the new provisions, alimony payments will no longer be tax-deductible. Instead, the payer will need to pay federal income taxes on his or her full income without reducing it by the amount of spousal support paid. This could result in a tax jump of thousands of dollars in many cases. On the other hand, spousal support will no longer be taxable to the recipient; instead, he or she will receive the funds tax-free.
For everyone who has already divorced or who will finalize a separation agreement or divorce by the end of 2018, these changes will have no effect. They will apply, however, to everyone who finalizes their separation or divorce in the new year. A New Jersey divorce lawyer could help people move forward in the process or examine alternative solutions after tax law changes go into effect.
How New Jersey Spousal Support May Be Affected
There are several ways in which these tax law changes could affect people who decide to divorce in New Jersey in 2019 and beyond. While the changes may seem like a boon to recipients, the actual outcomes may be more complicated. The above-the-line tax deduction traditionally associated with alimony was also a strongly persuasive factor in favor of a generous settlement on spousal support.
Without the motivation provided by the tax deduction serving to offset the amount of alimony paid, payers may have less of an incentive to agree to generous spousal support. Taking the income tax-free can also affect how recipients handle their funds; for example, they would no longer be eligible for inclusion in certain types of Individual Retirement Accounts (IRAs).
Coming to An Agreement on Alimony
The result of these changes could be more complex and lengthy divorce negotiations, especially for couples with significant assets and high incomes. While the government is expected to bring in an additional $6.9 billion over 10 years, divorcing spouses may find themselves battling over alimony payments.
Recipients are likely to seek increased payments, especially as the income will be tax-free. On the other hand, payers are likely to push for low payments or none at all, given that they will no longer receive a tax advantage for agreeing to a generous settlement. Many professionals estimate that the overall effect of the new law will be to reduce alimony payments for people who settle their divorces in 2019 and beyond.
If you’re considering divorce in 2019 or beyond, reach out to the New Jersey family law attorneys at Morgenstern & Rochester. With partners boasting more than 50 years of combined family law experience, we can help you find a solution that protects your assets and helps you move forward after a divorce. To set up a consultation with one of our Cherry Hill divorce attorneys, contact us via email or call our office today at (856) 489-6200.