One of the biggest national news stories is the proposed changes to the Federal Tax Code. Over the past few weeks we have heard a great deal about potential changes to tax brackets and questions about whether or not property tax and state income tax deductions will remain deductible. It’s not often that federal laws or regulations impact New Jersey family law–but the tax proposal could have such an impact.
The “Tax Cuts and Jobs Act” as currently proposed will remove the tax break to those paying alimony (section 1309 of the tax bill). As currently structured, alimony law is taxable to the receiver (obligee) and tax deductible to the payer (obligor).
This is different from child support, which is treated as a non-taxable event. If the current version of the Tax Code changes are implemented, then alimony will similarly be a non-taxable event. This will help the federal government save money as the alimony payer is generally in a higher tax bracket than the tax payee. Divorce attorneys often negotiate divorces based upon the tax impact of alimony–particularly regarding alimony buy-outs.
I have often joked with alimony payers that the tax break is the “silver lining” in paying alimony. Those in the higher tax brackets often can deduct at least 25%-33% of alimony payments, meaning the portion of their income that they do not actually keep are ultimately treated as tax-neutral. If this portion of the Act survives, then it will mean that New Jersey Divorce Attorneys will need to revisit such practices. The drafting of Marital Settlement Agreements referencing alimony should also be undertaken with the fluid nature of the tax code provisions considered. Some in the press are already referring to this proposal as the “divorce penalty.”
For those that are already divorced and paying long-term or permanent alimony (particularly those that divorced prior to NJ Alimony Reform), this tax code change is currently going to be applied prospectively–meaning their should be no change for those divorced prior to December 22, 2017.
Section 1309 of the pending Act currently states in relevant part that (in proposal form only):
“For purposes of this paragraph, the term ‘divorce or separation instrument means (i) a decree of divorce or separate maintenance or a written instrument incident to such a decree, (ii) a written separation agreement, or a decree requiring a spouse to make payments for the support or maintenance of the other spouse… The amendments made by this section shall apply to (1) any divorce or separation instrument (as de- 19 fined in section 71(b)(2) of the Internal Revenue 20 Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 22 2017, and (2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date…”
The final form of this Act–should it be passed at all–may not contain this clause or may contain a modified version of this clause. That said, for those considering divorce this is another factor to consider when finalizing a divorce agreement.
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