Enacted in late 2017, key provisions of the federal Tax Cuts and Jobs Act for divorcing spouses are set to take effect on January 1, 2019. These changes have the potential to drastically impact certain financial aspects of divorce, and spouses who are currently contemplating a divorce in New Jersey will need to factor the new law into many of their decisions.
New Tax Treatment for Alimony Begins January 1, 2019
The most significant change taking effect on January 1 is the reversal of the federal tax treatment for alimony. Under the outgoing law (which has been in place for more than 75 years), spouses who pay alimony are entitled to deduct the payments from their taxable income, and those who receive alimony must report the payments on their annual returns. This has provided a significant financial incentive for many high-earning spouses to agree to incorporate alimony provisions into their divorce settlements – and it has in turn provided spouses who gave up career opportunities during their marriage important leverage to negotiate for post-divorce financial support.
But, under the Tax Cuts and Jobs Act, this tax treatment is reversed. Under the new law, alimony payments are no longer deductible, and recipients no longer need to report alimony as taxable income. While this may initially seem to serve the interests of spouses who need support by allowing them to keep more (or, rather, all) of their alimony payments, the lack of a tax deduction for payors means that many high-earning spouses will be less inclined to negotiate alimony when there are less-costly options available.
In fact, as Reuters.com reported before the Tax Cuts and Jobs Act became final:
“[E]xperts said it was not clear that the House tax reform proposal would generate more revenue. It could, instead, make alimony rarer, and lower the amounts paid.”
Importantly, the new law only applies to divorces finalized on or after January 1, 2019. If you are already divorced, or if you will be able to finalize your divorce before the end of the year, then the pre-existing law will continue to apply even after the Tax Cuts and Jobs Act’s alimony provisions take effect. Additionally, modifying a pre-2019 alimony order will not trigger application of the new alimony tax law unless the parties specifically elect for the new income tax treatment.
Additional Impacts of the Tax Cuts and Jobs Act for Divorcing Spouses
Along with the reversal of income tax treatment for alimony, the Tax Cuts and Jobs Act includes a number of provisions with potential implications for divorcing spouses as well.
- Elimination of the Tax Exemption for Dependents – The Tax Cuts and Jobs Act eliminates the $4,050 dependent exemption for parents. Under pre-existing law, this exemption was often a point of negotiation in divorce settlement discussions.
- Elimination of Home Equity Deduction and Reduction of Mortgage Deduction – The Tax Cuts and Jobs Act also eliminates the deduction for home equity loan payments, and it reduces the mortgage interest deduction. With property and debt distribution taking center stage in many divorces, these changes are likely to impact a number of divorcing spouses’ priorities as well.
- Elimination of Deductions for Professional Fees – Under the Tax Cuts and Jobs Act, legal fees paid for purposes of obtaining alimony are no longer deductible, nor are fees paid for tax preparation.
Speak with a Bergen County, NJ Divorce Lawyer in Confidence
If you would like more information about the effects of the Tax Cuts and Jobs Act on your divorce, we encourage you to contact us for a confidential initial consultation. To speak with an experienced divorce lawyer at our Bergen County, NJ family law offices, please call (201) 430-7845 or request an appointment online today.