It’s no secret that most of the divorce complaints in New Jersey are resolved via settlement. However, the tax bill which was recently passed and signed by the President is poised to shake the foundations of the practice.
For the last 75 years, the IRS code has treated spousal support, also known as alimony, as income to the recipient spouse. This treatment made the alimony payments tax deductible to the payor, reducing their gross income for tax purposes. By shifting the tax liability to the recipient payee, who usually was in a lower tax bracket, the payor generally received a benefit. And since the tax exposure for the payee was less than the payor, it resulted in more money coming into the payee’s household. This shifting of tax liability, by treating alimony as income to the payee and deductible to the payor, is one of the foundations upon which family law has been practiced for the past three-quarters of a century. But for divorces that take place after December 31, 2018, this will no longer be the case.
The pending tax plan will eliminate the alimony tax deduction for payors for divorces taking place after December 31, 2018.
What does this mean for already those already divorced?
Luckily, all prior judgments of divorce which are premised upon the tax shift will be upheld and will remain enforceable. The tax plan is not meant to be retroactive, but prospective in nature. However, it is unclear whether any future change or modification to an existing divorce settlement will be impacted by the new plan.
What does this mean for those want a divorce and have not yet filed?
If you want a divorce, then make every effort to resolve your matter – either through the Courts or through alternative dispute resolution, such as a collaborative approach or mediation, as soon as possible, with an eye on the December 31, 2018 deadline if you want to take advantage of the sunset on the tax deductibility of alimony.
What other impact will the tax plan have on family law issues?
Child support is based upon the parties’ respective incomes, as well as some specific expenses. The New Jersey Child Support Guidelines treated alimony as income to the recipient/payee and deductible to the obligor/payor. This new treatment of alimony under the tax plan will require the Courts to review the child support guidelines calculations and the worksheets upon which they are based, as the current set of guidelines will not apply to new cases. But the old guidelines and programs will still need to be available, because in cases predating January 1, 2019 where there is an alimony component, alimony will still be tax deductible to the payor and taxable to the recipient. This potentially could have a huge impact on child support. Depending on how the spousal support is treated in the guidelines, it may also have a large impact on the percent contributions either party has to the child’s extracurricular, unreimbursed medical, day care, and college educational expenses (among others). Previously negotiated pre-marital agreements which discuss alimony may be premised upon the tax liability shift to the payee. It is anticipated that litigants with alimony exposure will not want to pay as much, as they will not receive a tax benefit. Divorce cases will be harder to settle, and litigation will probably increase.
The new tax bill is going to make sweeping changes which will impact essentially everyone who files a tax return. If you have a pre-nuptial agreement already, or if you have questions about the new tax bill will impact you and your divorce, you should speak with a qualified tax professional and with an experienced family law attorney at Hoagland, Longo, Moran, Dunst & Doukas, LLP. Please do not hesitate to contact me at firstname.lastname@example.org or at 732-545-4717.