Federal tax reforms from the ‘Tax Cuts and Jobs Act’ (TCJA) took effect Jan. 1, 2018. While the changes will impact all Americans filing tax returns in 2019, divorcing taxpayers should pay extra close attention to how the TCJA will affect their alimony agreements.
Thanks to federal tax reform, alimony agreements signed in 2019 no longer factor into your federal tax return. Like New Jersey child support payments, the money spent on alimony will no longer be federal tax deductible for the payor and will not be considered federal taxable income to the recipient. Divorces finalized before Jan. 1, 2019, were grandfathered in under the old tax rules.
As of March 2020, New Jersey has not changed its law to conform with federal tax reform, which means for state income tax purposes, all alimony payments remain deductible for the payor and taxable to the recipient.
Alimony Is No Longer Federal Tax Deductible for the Payor (for Agreements Signed in 2019)
Higher-earning spouses have traditionally agreed to more generous alimony arrangements because they could write off the payments as tax deductions. The payments were taken off the top of the payer’s entire taxable income, which allowed some individuals to file in a lower tax bracket (and at a lower tax rate).
This is no longer the case. Under the new tax law, there is no federal tax benefit to making alimony payments. This will undoubtedly impact the settlement strategies of higher-earning spouses in 2019.
Alimony Is No Longer Considered Federal Taxable Income to the Recipient (for Agreements Signed in 2019)
This would appear to be a major financial windfall, especially considering the recipient is usually in a lower tax bracket than the payor to begin with. But not so fast- judges take several criteria into consideration when determining a spousal support arrangement, including the tax implications of alimony payments.
If the payor can no longer afford bigger payments without the tax deduction, the judge may agree to smaller payments. Or parties may agree to a lump sum divorce settlement instead. Both options could leave the recipient with less money overall.
In addition, the spousal support recipient may have to revisit his/her retirement strategy. Retirement account contributions often require the use of taxable income, which may force the recipient to find the contribution money from somewhere else.
Beware of New Jersey Alimony Modifications in 2019
Divorces finalized before Dec. 31, 2018, will be grandfathered under the old federal tax rules. However, this arrangement may be voided if an old agreement is modified after the Dec. 31 deadline and specifically states the TCJA treatment of alimony now applies.
Attorneys should be on the lookout for alimony modification requests in 2019 that are intended to take advantage of parties not aware of the new federal tax law’s implications.
Additional New Jersey Alimony Reforms to Consider
In 2014, Governor Chris Christie signed an alimony reform bill that removed the concept of “permanent alimony” and replaced it with “open durational” alimony. For marriages lasting fewer than 20 years, the duration of payments cannot exceed the lifetime of the marriage with little exception.
For example: If you were married for two years, the duration of alimony payments cannot exceed two years.
Divorcing couples in New Jersey must take these additional restrictions into consideration when negotiating a spousal support agreement.
Hire a New Jersey Divorce Lawyer
The divorce attorneys at Arons & Solomon work with a team of experts, including Certified Financial Planner™ professionals and CPAs, to help people create divorce settlements that meet their financial needs.
To gain peace of mind that you are getting the most out of your existing or pending alimony arrangement, contact us for a free consultation.