Effective January 1, 2019, the Tax Jobs and Cuts Act, which was enacted at the end of last year, will change how alimony payments and awards are treated by the IRS. Currently, any alimony paid is deductible by the payor spouse, while all alimony received is treated as taxable income to the payee spouse. With the new tax laws in place, any divorces that are finalized on January 1, 2019 or later will no longer be subject to those rules. The payor will no longer be able to deduct his obligation and the payee will not be allowed to treat it as income.
This carries substantial implications for the calculation of alimony in the State of New Jersey. As of right now, there is no formula for the calculation of alimony, nor do we expect the Legislature to enact one in the near future. Nevertheless, up until now, many practitioners have used what has come to be referred to as the “one-third rule of thumb” in order to obtain an approximation of alimony. Specifically, one-third of the disparity in the parties’ incomes is calculated and called alimony. The income figures used for this calculation were gross numbers, since the assumption was that the taxes would be dealt with at the time of the filing of the returns.
With the new changes to the tax laws, this “rule of thumb” is no longer applicable. A one-third calculation of the difference in gross incomes will no longer produce an equitable result if the payor spouse is unable to deduct those alimony payments. Instead, practitioners will now have to look more closely at the statutory factors for alimony and will need to calculate as accurately as possible the parties’ marital lifestyle, the payor’s ability to pay, and the payee’s actual need. It remains to be seen how practitioners and courts will apply these new tax laws to future divorce cases.
If you would like to discuss what these new tax laws mean for you, schedule a consultation with Birz Law, LLC at (201) 701-1218.