Divorce settlements are never straightforward, and this year, they became even more intricate. The federal government’s sweeping overhaul of the tax code reformed many of the calculations that influence divorce. Many New Jersey couples learned this year how tax code changes affected their return, with some people owing more than they had expected. Many divorce experts believe that the amendment will make negotiations tougher.
According to the new law, alimony and separate maintenance payments are no longer deductible for any divorce or separation agreement executed or modified after December 31, 2018. For divorces after this date, the spouse paying alimony can’t use the payments as a tax deduction, and the spouse receiving the payments no longer has to pay taxes on it.
To explain how things were interpreted under the old rule, consider Spouse A pays and deducts $30,000 a year in alimony. Spouse A’s income is federally taxed at 32 percent, so the deduction saves this spouse almost $10,000 in taxes. Spouse B owes taxes on the alimony at 22 percent, paying around $7,000 instead of the $10,000 that would be due at Spouse A’s rate. The divorced couple would end up saving more than $3,000.
Alimony recipients no longer have to pay taxes on the alimony payments they receive. However, it may be more difficult for them to negotiate a profitable settlement or get a favorable court order because the rule leaves the divorced couple with less money between them.
Both taxes and divorce are complicated matters, and when they are mixed together, it can get even more confusing. If you are planning to file for a divorce, it’s a good idea to consult a legal professional to make sure that you and your partner understand the new law regarding taxes and alimony.