New Federal Tax Law Will Reshape Alimony in NY and NJ

According to the current federal law, alimony payments – also known as spousal support – are tax deductible for the spouse making the payments. The newly-approved tax bill, however, shifts the tax benefit from the paying spouse to the receiving spouse. This will have a significant effect on divorce proceedings.

About the new 2017 tax law

On December 22, 2017, Congress passed, and President Trump signed into law, The Tax Cuts and Jobs Act. The Act is the most significant change to the federal tax law in three decades.  It promises to simplify the tax code, primarily by:

  • Lowering individual and corporate tax rates
  • Eliminating multiple tax credits and deductions
  • Increasing the child tax credit, and
  • Repealing the health care individual mandate penalty

For divorcing couples, the most important change affects the deductibility of alimony paid to a former spouse.

Who is affected by change in alimony deductions

Under the current law, an ex-spouse may deduct the amount paid in spousal support while the recipient pays taxes on it. It is common for the spouse paying alimony to be in a higher income bracket than the receiving spouse, so the taxes saved under this situation can often encourage the parties to negotiate more generous support agreements. Under the new tax plan, the balance shifts, so the payer will no longer be allowed to deduct the amount paid, and the receiving spouse will receive the payments tax-free.

The tax change will affect anyone who signs a separation agreement, or whose divorce is granted, after December 31, 2018. For anyone currently facing or anticipating to soon face a divorce, this is an important date to keep in mind. Separations or divorces finalized before December 31 will continue to be tax-deductible by the payer.

Effect of tax change on divorce in NY and NJ

The tax change will affect tens of thousands of New York and New Jersey residents who are undoubtedly already going through a stressful life change. In addition to removing the incentive for higher tax bracket spouses to agree to a more generous support agreement, it will necessitate a new approach for judges who make alimony awards, and lawyers who negotiate divorce and separation settlements.

Judges in New York and New Jersey make use of guidelines or calculators when deciding whether and how much alimony to award. New Jersey judges primarily consider a number of factors, such as:

  • Length of the marriage
  • Need and ability of each spouse
  • Relative earning capacities
  • Parenting needs of any children
  • Other factors deemed relevant by the court

New York judges begin with a calculator and then make adjustments based on the circumstances of the individuals. The significant amount of additional taxes that many ex-spouses will incur because of the legislation will call for reconsideration of the current approach.

Speak with our matrimonial lawyers if you are facing a divorce

The recent tax changes undoubtedly raise some questions, fears, and need for wise counsel. If you are facing a divorce or separation, call a NY & NJ divorce attorney from Kantrowitz, Goldhamer & Graifman. Given the potential long-term effects of a short-sighted separation agreement or divorce award, it is important to be prepared. We have offices in Rockland County and Bergen County to meet you where and when you need us. Call today to schedule a consultation.

 Additional Tax Law & Alimony Resources:  

  1. USA Today, Exes and taxes: How the tax overhaul would alter alimony, https://www.usatoday.com/story/money/taxes/2017/12/24/exes-and-taxes-how-tax-overhaul-would-alter-alimony/976413001/
  2. CBS News, 4 popular deductions the GOP tax plan would end, https://www.cbsnews.com/news/4-popular-deductions-the-gop-tax-plan-would-end/