How to Report Alimony on Federal and NJ State Taxes
How the New Alimony Tax Laws Affect New Jersey Residents
If you’re one of the 243,000 people who receive or give alimony each year, knowing how to report these payments during tax season is very important. The Tax Cuts and Jobs Act of 2017 greatly changed how alimony is dealt with, but did you know that these new laws do not apply to your New Jersey taxes? This guide will help you figure out how to handle alimony payments as you work on filing your taxes.
Can You Deduct Alimony Payments on Federal Taxes?
For a long time, alimony was a deductible expense on taxes. This means that you used to be able to avoid paying taxes on the income that you spent as alimony, so the system was essentially set up to favor the person paying alimony by giving them a small tax break. However, the recently enacted Tax Cuts and Jobs Act has changed this at the federal level. Now, payers do not get any tax breaks associated with the alimony. If you make the error of deducting your alimony payments, you can end up with fines and other consequences for an incorrectly filed federal income tax return.
Do You Have to Count Alimony as Income on Federal Taxes?
The Tax Cuts and Jobs Act also changed the way things were handled for those who receive alimony. Previously, alimony was viewed as income, so you had to pay federal taxes on any payments you received. However, things have changed so that the person receiving the alimony has a tax advantage instead of the payer. There is no longer any requirement to report alimony you receive on your taxes. It does not count as income that you have to pay taxes for. Instead, you will receive the full sum of your alimony as non-taxable money.
How Do You Tell if the Changes Apply to You?
It is important to note that the Tax Cuts and Jobs Act of 2017 only changed alimony rules for people who finalized their separations or divorce agreements on or after January 1, 2019. If your Bergen County divorce attorney helped you finalize your divorce or separation before this cutoff date, the old rules about getting deductible alimony and having to claim alimony as income on federal taxes still apply to you. The only reason the new tax laws would affect a couple that got divorced in 2018 or earlier is if they modified their agreement and changed the terms of the payments to specify that the new tax laws would apply.
Have the Federal Changes Affected State Taxes?
It is important for New Jersey residents to keep in mind that these laws only apply to federal taxes. New Jersey has not changed its rules for how alimony is handled on state taxes. So, is alimony deductible in New Jersey? When you file your state taxes, the answer is yes. You can still deduct any court-ordered alimony or separate maintenance payments that you make to an ex-partner. Meanwhile, alimony is taxable income in the state of New Jersey, so anyone who receives alimony payments must still claim the alimony as income and pay their state taxes on this income. If you make the mistake of not paying income taxes on the alimony you receive, you may get in trouble with the state of New Jersey. The fact that New Jersey’s laws remain the same means that those who pay alimony can save a small amount on their state taxes. Meanwhile, those who receive alimony will save big on federal taxes, but they still need to pay a little in state taxes.
Do the Changes Alter Child Support Rules?
The new tax laws might change how alimony is handled, but it is important to note that these changes do not affect child support at all. In both federal taxes and New Jersey state taxes, child support is never viewed as a type of taxable income, and it is never deductible by the payer. The government handles child support payments this way because child support is not meant to maintain an adult’s lifestyle. Instead, it is meant to take care of all the essentials of raising a child, such as food, housing, and schooling. If you are ordered to pay child support and do not meet your obligations, both the federal and state governments can garnish your refund and apply it to supporting your child.
How Do the Tax Changes Affect Property Division?
Another aspect of separating finances after a divorce is the division of marital property like real estate, IRAs, and retirement accounts. The tax changes only affect the regular alimony payments you receive after your divorce is settled. Like child support, initial property division rules remain the same. The initial division of property you get as part of your divorce settlement is not taxed on a federal or state level.
Should You Still Consider Alimony During Your Divorce Agreement?
The changes to federal income tax regulations are adjusting the way many people handle divorces. Previously, alimony was deductible while child support and exchanging property was not. Therefore, some people with a high income used to offer to pay higher alimony in exchange for lower child support. With the changes to federal taxes, there is not as much of a deduction incentive for paying alimony anymore. However, since New Jersey does still allow some deductions, higher alimony may still be a bargaining chip in certain divorces. The changes to federal taxes make alimony even more valuable to the recipient because they no longer have to pay taxes on it. In situations where a couple has been married for a while and one partner managed the home at the expense of their career, alimony can be a useful form of compensation that helps them rebuild their life after a divorce. Every couple is different, so you should talk with your lawyer about whether or not you want to address alimony in your divorce agreement.
Getting Assistance From a Lawyer
In short, the changes to federal tax law mean alimony payments are neither deductible nor taxable income if you finalized your alimony agreement after 2018. However, in the state of New Jersey, you still can deduct alimony payments you send, and you must pay income taxes for payments received. This reversal of the rules can cause a lot of headaches during the tax season. If you have any questions, talk to your divorce lawyer, financial advisor, or tax preparer. Handling all the complexities of alimony, child support, and taxes adds a new level of difficulty to the divorce process. Therefore, you should seek professional help if you are confused. At the Law Office of Kelly Berton Rocco, we’re ready to answer your questions. You can speak to an experienced Bergen County divorce attorney who will guide you through all the financial aspects of a divorce. We are happy to be on your side and give you the support you need. Call us at (201) 343-0078 in Hackensack or send us an email to schedule your free divorce consultation.