As an experienced Somerset County, NJ alimony law attorney I have had to keep up with recent changes in New Jersey alimony statutes. If you are contemplating getting divorced, are in the process of getting divorced, or are the recipient or the payor of alimony in NJ, you need to read on – there was a major change to the federal tax treatment of alimony recently.
Read on for how new law changed the tax treatment of alimony so that the federal government taxes your alimony at a higher rate, and make more money from your divorce. I will also summarize the alimony reform that took place in NJ in 2014.
Changes to the Tax Treatment of NJ Alimony
The new tax law signed and put into effect by the Trump administration in late 2017 changed the federal tax treatment of alimony significantly.
The Former Federal Tax Treatment of Alimony in NJ
Before the law changed, an alimony obligor could deduct alimony payments on a pre-tax basis. The alimony recipient would then claim those alimony payments as income, and because the recipient is in a lower tax bracket than the obligor, the recipient paid less in federal taxes on that money than the obligor would have.
This arrangement meant that the government was paid less in taxes on funds that, if not paid in alimony, would have been taxed at the obligor’s higher tax bracket. Do you wonder why this law was changed?
The Current Federal Tax Treatment of Alimony in NJ
The new law renders alimony paid pursuant to any judgment entered after January 1, 2019 as not tax deductible by the obligor and not taxable to the recipient. So, the federal government makes more.
The timing of the judgment matters: If you were divorced by the end of 2018, alimony is taxed under the previous rule. However, if your divorce is finalized on or after January 1, 2019, or if you modified your alimony arrangement on or after January 1, 2019 or intend to modify your arrangement in the future and then do so, the new law may apply.
State Law Tax Treatment of Alimony in New Jersey
New Jersey still allows obligors to deduct alimony payments from income on their state tax return. Recipients of alimony must report alimony received as income on their state tax return.
This not only complicates the parties’ tax returns, but complicates any ongoing negotiations by divorcing parties as the previous incentive for an obligor to settle on a (tax deductible) spousal support amount is greatly diminished.
NJ Alimony Reform
On September 10, 2014, then Governor Christie signed bill A-845 into law, substantially changing the alimony statute. N.J.S.A. 2A:34-23.
How was the statute changed? Well, first, it did not apply retroactively – meaning, divorced couples whose judgment of divorce and marital settlement agreement were already signed were not affected.
No Permanent Alimony in New Jersey
Permanent alimony, also called lifetime alimony, was replaced by “open durational” alimony, for any marriage that is 20 years or more in duration. Under current NJ alimony law, if a marriage is less than 20 years, the duration of alimony payments shall not exceed the length of the marriage unless there are “exceptional circumstances,” such as:
The ages of the parties at the time of the marriage and at the time of the dissolution;
The degree one spouse is dependent upon the other spouse;
Whether one spouse has a chronic illness or other unusual health circumstance;
Whether one spouse gave up a career to support the other spouse;
Whether one spouse has received a disproportionate share of the marital estate;
The impact of the marriage on a spouse’s ability to become self-supporting, such as that spouse being primary caretaker of a child;
Tax considerations of either spouse;
Any other factors the court deems equitable, relevant, and material.
So while the family law judge has leeway to consider all of these factors, it has become much less likely for a spouse to receive alimony for more than the number of years of the marriage.
The new law further provides that no single factor of the above factors shall carry more weight than the others, unless the court finds that one should, in the interest of fairness..
Last, the new law requires the court to consider the length and amount of any pendente lite (interim) support payments made during the pendency of the divorce. This change was meant to keep the recipient from delaying the divorce proceeding to receive payments for a longer term.
Retirement and NJ Alimony Laws
The new law created a rebuttable presumption that alimony would cease once the obligor retires at full retirement age (currently 67). This presumption is overcome and alimony continues if good cause is shown by the following factors:
The parties’ ages, health, assets when the obligor applied for retirement;
The parties’ ages when married and when the alimony order was entered;
How much the recipient of alimony was dependent upon the obligor during the marriage;
Whether the recipient sacrificed any rights or property in exchange for more alimony;
Alimony already paid;
Current sources of income for either party
Whether the recipient was able to save for retirement;
Any other factors the court deems equitable, relevant, and material.
An obligor can retire prior to full retirement age if he or she can prove by a preponderance of the evidence that the proposed retirement is reasonable and made in good faith.
Alimony Modification Due to Obligor’s Loss of Income in NJ
The 2014 changes were meant to provide a streamlined process by which the parties could obtain, and the court determine, post-judgment modification of alimony.
To reduce or eliminate alimony, self employed obligors must show that the reduction in income is involuntary. The obligor must also set forth “the economic and non-economic benefits the party receives from the business.”
Non-self-employed obligors who suffer a loss in income may seek a reduction in alimony after 90 days of the reduction. Then the courts consider the following factors, among others:
The reason for the loss of income;
The obligor’s efforts to find employment;
Whether the obligor has made a good faith effort to obtain employment of any kind;
The income of the obligor and the circumstances of the recipient.
While critics of the 2014 law say it did not go far enough, these changes have been proven to streamline the process somewhat. What effect the 2018 federal law will have remains to be seen.
Please be advised that this is not tax or legal advice, but rather a summary of recent issues you should consider when consulting with your attorney or accountant.
Katherine K. Wagner, Attorney At Law is located in Somerville, NJ and serves clients in and around Somerville, Raritan, Lyons, Bridgewater, Manville, Zarephath, Neshanic Station, Pluckemin, Whitehouse, Martinsville, Bound Brook, Belle Mead, South Bound Brook, Bedminster, Whitehouse Station, Three Bridges, Liberty Corner, Warren, Middlesex, Somerset, Stanton, Skillman, Blawenburg, Far Hills and Somerset County.
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