Managing divorce and alimony under the new tax law

Starting on January 1st, 2019, couples getting a divorce in New Jersey will have to be mindful of new rules regarding alimony and taxes if spousal support will be an issue. In a nutshell, payers will no longer be able to deduct their payments for tax purposes. Also, recipients will not have to report their spousal support payments as income. However, some smart planning may minimize financial concerns for couples not able to beat the clock and get their divorce in before the changes take effect.

It’s not easy for couples to rush a divorce involving alimony just to beat the clock. This is because an alimony agreement must be a final settlement or court order, not a temporary one. Instead, it may be wiser for separating spouses to focus on other things affected by tax law changes, such as ownership of the marital home and custody of children.

Capital gains deductions up to $250k for single filers and $500k married but filing jointly filers are still available just like before. But state and local income tax deductions are now capped at $10k, and mortgage interest deductions are down to a $750k cap from the previous $1 million. The child tax credit, however, is $1,000 more per child, which could provide an added incentive for a newly single adult to seek primary or sole custody. With support payments, couples may want to explore other options. Possibilities include non-taxable payments for property division divided into multiple payments spread out over time and a one-time payment in lieu of alimony.

Even with the tax changes, an attorney might advise a divorcing client to opt for alimony since division of property payments may stop if an ex files for bankruptcy. This isn’t the case with maintenance. Plus, wage garnishment percentage is higher with alimony as opposed to property division in the event of non-payment. The ability of a lawyer to prepare a divorce agreement that allows for a one-time payment or reasonable alimony terms that may offset tax changes is mainly dependent on how civil divorcing spouses can be with one another.

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