The New Year is upon us and with the beginning of 2019 will come some major changes to tax laws that potentially impact divorces in New Jersey and the rest of the country. Chief among those is how alimony payments will be handled for tax purposes in a divorce. For the past 70 years, alimony has been deductible for the payor and taxed as income for the payee. The benefit to this was that the payor got to reduce his or her amount of taxable income and the recipient paid the income tax, which was typically at a lower rate than that which the payor would have paid.
The change that becomes effective Jan. 1 states that the payor will pay the income tax and the payee will not have to pay tax on the alimony received. While this may make alimony payments more difficult to afford, there are other changes and options to be considered. The child care tax credit has doubled from $1,000 to $2,000 per child. For example, a custodial parent with three children under 17 who makes $100,000 would qualify for $6,000 in tax credits. In addition, division of property is typically not considered a taxable event, and as of January 1, there will be no differences, from a tax perspective, between alimony payments and property division payments.
Another possible option is to make one lump sum payment to a partner in lieu of paying alimony. This can allow for a more civil settlement and may ultimately result in a smaller one. Settlements that drag out often become more expensive over time.
Divorce is seldom easy in New Jersey and is seldom contemplated lightly. If a person believes divorce is the best option, a consultation with an experienced family law attorney can be helpful. A knowledgeable attorney can acquaint one with all of the tax law changes for 2019 and make suggestions based on one's personal financial situation.