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The Tax Cuts and Job Cuts Act of 2017 (TCJA) significantly changed the tax treatment of alimony under federal law. Previously, the spouse receiving alimony had to declare it as income on their tax return, and they were responsible for paying taxes. The paying spouse could take the alimony as an above-the-line deduction, meaning they could reduce their income by the amount they paid.
Now, alimony does not count as income. The recipient gets the money free and clear of any tax obligations. The paying spouse does not get any credit for what they paid on their tax return. The new tax laws are something that both spouses would need to consider before they reach a divorce agreement that addresses alimony.
However, the TCJA does not apply retroactively to court orders issued before the law became effective. If a spouse has been receiving alimony for a long time for an agreement signed before January 1, 2019, it would still be considered income for purposes of a tax return. The paying spouse can continue to deduct the payments from their income. Any agreement before the law was enacted is grandfathered into the old tax treatment.
The Tax Treatment of Alimony May Be Different Under New Jersey Law
Alimony may still be considered income under New Jersey law. The recipient may still need to report the income and pay taxes, while the paying spouse can at least take a deduction on their New Jersey state tax return.
The rules about child support have always remained the same. Child support is never considered income for the receiving parent. The check represents money that the parent needs to pay for child-related expenses. Child support is money the paying parent would have needed to spend anyway to support their children had they still been in a relationship with the child’s parent.
The Greater Burden on the Paying Spouse May Be Considered in Other Ways
The new tax laws make life more difficult for spouses paying alimony. However, they will not necessarily be more financially strapped because they can no longer deduct the payments. First, child support is calculated based on the parent’s net income after all payments have been made. If a parent loses the tax deduction for alimony payments, they may not need to pay as much child support because they will have a lower net income.
In addition, a court may consider one spouse’s alimony obligations when determining how the marital property will be distributed. The spouse who must pay alimony may be awarded a higher share of the marital assets, so they can continue to afford to pay alimony. The court could order a more significant share to go to the other spouse instead of one spouse’s paying alimony. In other words, courts may consider the equities of the situation before making an award and may look at the overall big picture.
Some options are available to both spouses when they are negotiating the settlement agreement. A lawyer can help you develop creative solutions that address the tax treatment of alimony. The two spouses may be able to “horse trade” when dividing the assets. However, both would have to consider the unique factors attached to their situation and the individual assets being divided.
Our Metuchen Divorce Lawyers at Wiley Lavender Maknoor, PC Help Clients Through Divorce
Contact our Metuchen divorce lawyers at Wiley Lavender Maknoor, PC if you are seeking a divorce. Call us at 732-494-6099 or contact us online to schedule your free initial consultation. Located in Metuchen, New Jersey, we serve clients in Middlesex County, Monmouth County, Union County, and Somerset County.