Have you gotten divorced yet? If not, you only have five months left. That is, six months before new tax laws come into play that could affect your case if you wait until 2019 to get divorced.
New Tax Laws are Coming
Under the current tax law (until 2019), someone who pays alimony does not have to pay taxes on income used to pay that money to a former spouse. That created at least a little sugar to help the bitter tasting medicine of alimony payments (for the payor) go down. In fact, some may have preferred to pay more alimony to avoid reaching certain tax brackets.
Alimony is (until 2019) still taxable by the recipient, but because recipients often have lower incomes, they are in lower tax brackets, and the extra income may not have a profound effect on what they pay in taxes anyway.
Starting in 2019, that deduction goes away for the alimony payors, although the alimony income is considered tax free for the recipient.
Impact on All Incomes
The new law can have a significant impact, especially for wealthier individuals. For example, someone making $500,000.00 paying $100,000.00 in alimony used to have a net cost of $50,000.00 in alimony because of the deductions that could be taken. Under the new law, it would cost you the full $100,000.00.
Because higher income earning individuals usually have the opportunity to utilize other deductions, it is generally thought that the new law will mostly affect middle to lower income individuals, who may have relied upon the $200-$400 break that the old tax laws provided.
Laws Will Change Many Areas of Family Law
This creates a huge problem in the process of calculating alimony in New Jersey. Many alimony guidelines already have the old deductions calculated into their formulas.
Other changes will affect those formulas, as well. For example, there are certain adjustments that are made to a party’s income to accurately calculate the amount of alimony he or she should pay their soon to be ex-spouse. Deductions that have been made for mortgage interest, state and local taxes in previous tax years, are all being capped. Home equity loans will no longer be qualified as deductible.
Some deductions will be changing, but we do not exactly know how because the IRS has yet to put out guidelines. For example, there is some question of what is and what is not qualified as a deductible for income paid through a corporation.
These changes also affect children because child support is based on net income, and net income is affected by all of the upcoming tax changes. For example, if a payor used to be able to take a deduction on home equity loans, it did not affect the payor’s net income. Now, it may lower net income, thus lowering the payor’s overall child support obligation.
Lawyers and other experts expect some chaos in the divorce courts, especially in early 2019, prior to the updating of formulas and software used to calculate alimony. Many parties with existing agreements may come to court seeking modifications to child support or alimony payment obligations based on the new laws.
Questions about the tax implications of your divorce agreement? Contact Agnes Rybar LLC for help with any kind of family law matter.
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