Tax Implications of Alimony Payments in New Jersey
Alimony is transferred from one party to another following a divorce so that the recipient can maintain a reasonably comfortable standard of living. The form of payment does not matter and could be cash, a money order, or a bank or wire transfer, as long as it is kept track of and in the appropriate amounts.
The tax laws surrounding alimony payments are always subject to change and can be difficult to comprehend, and mistakes you make while applying them could result in legal trouble. If you have questions about the tax implications of your alimony payments, contact an experienced New Jersey legal team.
Legal Changes Regarding Taxes and Alimony
Until January 2019, alimony in New Jersey was tax deductible by the person paying, and it was includable by the person receiving. Now, it is no longer a deduction and no longer considered income. The party paying spousal support must understand that they are paying tax on their alimony payments. If it were deductible, they would be paying less tax altogether.
This may lead to a better outcome for the recipient because they do not have to pay income tax on it. During negotiations, attorneys may adjust the number on an alimony agreement to take taxes into account.
If the parties entered an alimony agreement prior to the tax law change, then the alimony still needs to be included as income. There must be a tax payment for it because the payor is still getting the deduction. It is important that the alimony is recorded by both parties and included appropriately when filing taxes.
Lump Sum Alimony Payments and Potential Windfall
If spouses are going to enter into an agreement where the paying party is giving a lump sum, there are many considerations to be taken into account. There would be tax implications, and the payor should acknowledge that this arrangement would involve paying money upfront that would otherwise be paid over time. It may be a great benefit to the recipient, but it is often not advisable to the payor.
The person paying the lump sum also has to keep in mind that it could potentially result in a windfall to the other party. For example, if someone pays alimony in a lump sum to their spouse and that spouse gets remarried a year later, they will not be able to recover that sum of money. If they had just been paying alimony in scheduled payments, their alimony would have stopped once their spouse’s circumstances changed.
An Attorney Could Explain Tax Implications in Alimony Agreements
A matrimonial attorney who is well versed in spousal maintenance agreements may be able to advise and educate you about the changing laws surrounding alimony taxes, whether you are the payor or recipient. When agreeing to an alimony sum, it may be important for both parties to take the tax implications into account and negotiate a fair number that will not result in a windfall.
Sometimes, it is appropriate to consult with a tax specialist in addition to an alimony lawyer. Tax experts could provide advice on the taxable effect of the payments and run different scenarios under different tax brackets. If the attorney deems it appropriate under the particular circumstances, they could recommend a particular tax specialist to consult with to produce more exact numbers.
Call a New Jersey lawyer today to schedule a consultation and learn more about the tax implications of your alimony payments.
