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Taxation and alimony payments

On Behalf of | Aug 12, 2021 | Alimony

The tax considerations that come with a divorce that can be considerable. It’s a big issue when people are splitting assets like retirement accounts. Depending on how those funds are received, they may be subject to tax. In New Jersey, there are also some special considerations around alimony payments. That’s true whether you’re the payer or the recipient of these funds.

Taxes and alimony in New Jersey

Divorce is one of the most complicated areas of family law. It touches everything from personal relationships to money. In New Jersey, alimony is treated like income. That means that people who receive it should expect to pay taxes on it. Meanwhile, the people paying alimony in New Jersey are generally able to claim it as a tax deduction.

In some cases, couples can arrive at an agreement that allows the recipient to avoid taxes. But this can only happen if the payer agrees not to claim the alimony payments as a deduction. Couples who are divorcing amicably should take this option under consideration.

Federal taxes and alimony

At the federal level, it used to be the same way. Broadly speaking, alimony was taxable as income for the recipient, and the payer could deduct it. In 2019, all of that changed. For couples who have divorced or modified a divorce agreement after the last day of 2018, alimony is no longer taxable or deductible.

Critics point out that this change to the tax law actually forces divorced couples to pay more money. Newly divorced couples will have less disposable income overall compared to other cohorts. Passed as part of the Tax Cuts and Jobs Act of 2017, it’s always possible that this rule might change in the future. Often, the tax code changes when political administrations do. That’s part of why it’s a good idea to work with a financial professional for tax preparation. They may be able to help you avoid some big mistakes when you file.