Effective January 1, 2019, new federal tax laws go into effect which significantly impact alimony. Under long-standing tax law, alimony has been tax deductible for the person paying it and taxable income for the person receiving it. The 2017 Tax Cuts & Jobs Act changed this for agreements signed after December 31, 2018. What does that mean for divorcing spouses?
- There may be changes in negotiation tactics for alimony. The law shifts the tax burden to the alimony payor (the spouse with more money). As a result, this may lead the higher-income divorcing spouse to fight to pay less in alimony because he/she lost the tax deduction. The parties may look for other ways to mitigate the tax impact to resolve these disputes. In addition, more consideration will have to be given to the actual cash flows of both parties to determine the ability to pay alimony.
- Legal fees cannot be deducted. Fees paid to divorce attorneys will no longer be tax deductible under federal law going forward.
- Be careful if modifying a previous alimony award. The new tax laws only apply to agreements signed after December 31, 2018. However, if a party had a prior agreement which he/she wants to modify in 2019 or beyond, then the new rules may apply, but only if the modified agreement specifically states that the new tax rules apply.
- New Jersey courts may consider the federal taxation of alimony in granting an award. Under N.J.S.A. 2A:34-23, the amount and duration of alimony is determined by an analysis of 14 factors, including tax treatment. As a result, the impact of the new federal law may be considered by the judge in the award in the event the parties cannot agree on their own.
The tax treatment of alimony will be a contentious issue in 2019. Whether mediating, negotiating or litigating alimony, it is important to discuss your options with experienced legal and financial advisors. If you are considering divorce, contact us for a consultation to learn how we can help you get the best result in your case.
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